Market Update -September 9

This holiday-shortened week got started on a softer note following last week's big gains. The Russell 2000 paced index losses, declining 2.1%, while the Nasdaq settled with a 0.1% loss. The S&P 500 maintained a position above 4,500 for most of the session until a sharp move lower in the late afternoon led the index to close just a whisker shy of that level.

Relative strength in mega cap stocks, which reflected an overall risk-off vibe in the market, helped limit losses for the major indices. Tesla (TSLA) was a standout in that regard, jumping almost 5.0%.

The selling was fueled by a jump in market rates, along with global growth concerns that were stoked by a batch of disappointing PMI readings from overseas and rising oil prices. The 2-yr note yield rose eight basis points to 4.96% and the 10-yr note yield rose ten basis points to 4.27%.

The sharp increase in oil prices contributed to the lackluster showing, prompting worries about inflation expectations and consumer spending pressures. WTI crude oil futures rose 1.2% to $86.55/bbl following news that Saudi Arabia and Russia are planning to extend their voluntary oil production cuts of 1 million barrels per day and 300,000 barrels per day, respectively, through the end of 2023.

Tuesday's economic data was limited to factory orders for July, which declined 2.1% month-over-month (Briefing.com consensus -2.4%) following an unrevised 2.3% increase in June. Excluding transportation, factory orders increased 0.8% month-over-month on the heels of a 0.3% increase in June. Shipments of manufactured goods rose 0.5% month-over-month after increasing 0.2% in June.

• The key takeaway from the report is that factory orders were better than they appeared in July given the strength seen in orders excluding the volatile transportation component.

Wednesday's trade started on a mixed note. There wasn't much conviction on either side of the tape early on, leading the major indices to trade near yesterday's closing levels. Stocks settled into a broad retreat, though, after market rates bounced in response to the ISM Services PMI at 10:00 a.m. ET.

The ISM Services PMI jumped to 54.5% from 52.7% and the Prices Index rose to 58.9% from 56.8%. That is a combination that will support the Fed's thinking that rates need to stay higher for longer. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, sat at 4.95% before the data, but settled up eight basis points from yesterday at 5.04%. The 10-yr note yield, at 4.25% before the data, settled at 4.29%.

Another jump in oil prices ($87.57/bbl, +1.02, +1.2%) contributed to the negative bias. That move, along with elevated gas prices, has stirred concerns about a slowdown in discretionary spending. On a related note, several airlines sounded a cautious note today about rising jet fuel costs.

The major indices were able to climb off their worst levels in the afternoon trade, but still registered decent losses. The S&P 500 for its part closed below its 50-day moving average (4,475). A big loss in Apple (AAPL) following a few negative headlines weighed heavily on the broader market. China banned government officials from using Apple devices, according to The Wall Street Journal, and the EU Commission designated Apple as one of six "gatekeepers," which will place it under a regulatory microscope.

Reviewing Wednesday's economic data:

• Weekly MBA Mortgage Applications Index -2.9%; Prior 2.3%
• July Trade Balance -$65.0 bln (Briefing.com consensus -$68.0 bln); Prior was revised to -$63.7 bln from -$65.5 bln
  • The key takeaway from the report is that there was a pickup in both exports and imports that was not suggestive of any material economic weakness on a global scale, yet there are clear signs of slowing with exports down 3.5% year-over-year and imports down 4.7% year-over-year.
• August S&P Global US Services PMI - Final 50.5; Prior 51.0
• August ISM Non-Manufacturing Index 54.5% (Briefing.com consensus 52.4%); Prior 52.7%
  • The key takeaway from the report is twofold: services sector activity accelerated in August but prices also increased at a faster pace. The latter will be a concerning development presumably for the Fed and the Treasury market, which will be contemplating the notion of rates needing to stay higher for longer.

Thursday's trade featured a lack of conviction among buyers. The Dow Jones Industrial Average closed with a slim gain while the S&P 500, Nasdaq Composite, and Russell 2000 declined 0.3%, 0.9%, and 1.0%, respectively.

Apple (AAPL) registered another sizable decline, which hung over the broader market. The ongoing weakness followed a Bloomberg report that China is aiming to broaden its iPhone ban to state and federal agencies. That sent semiconductor stocks lower as well, leading to a 2.0% loss in the PHLX Semiconductor Index.

Market participants were focused on action in the Treasury market, which was turbulent. The 2-yr note yield, at 4.99% just before the economic data, hit 5.05% in the immediate aftermath but settled at 4.96%. The 10-yr note yield was at 4.27% before the data, hit 4.31% immediately after, but settled at 4.26%.

Reviewing Thursday's economic data:

• Weekly Initial Claims 216K (Briefing.com consensus 233K); Prior was revised to 229K from 228K; Weekly Continuing Claims 1.679 mln; Prior was revised to 1.719 mln from 1.725 mln
  • The key takeaway from the report is that initial claims -- a leading indicator -- were at their lowest level since February. That is really good news -- economically speaking -- but it is also news -- monetary policy speaking -- that will likely keep the Fed in a restrictive policy position for longer.
• Q2 Productivity - Rev. 3.5% (Briefing.com consensus 3.7%); Prior 3.7%; Q2 Unit Labor Costs - Rev. 2.2% (Briefing.com consensus 1.6%); Prior 1.6%
  • The key takeaway from the report is that unit labor costs weren't as low as previously reported, so they look disappointing at the headline level; however, they still fit the bill of disinflation given that unit labor costs were up 2.5% a year ago.

The three major indices closed with modest gains, albeit off their highs of the day. Early upside moves had the S&P 500 and Nasdaq approaching their respective 50-day moving averages, which acted as areas of congestion over the past four weeks.

Apple (AAPL) drove a lot of the index level price action today. Apple had been up as much as 1.5% around the time that market hit session highs, but shares ultimately closed just modestly higher than yesterday.

Other mega caps were relative outperformers, offering some support to the broader market. The Vanguard Mega Cap Growth ETF (MGK) rose 0.3% and the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.1%.

Eight of the 11 S&P 500 sectors closed in the green led by energy (+1.0%), which climbed alongside oil prices ($87.47/bbl, +0.50, +0.6%). The real estate sector (-0.6%) logged the biggest decline.

Rising rates had kept pressure on the stock market this week, so today's muted action was a welcome development.

Friday's economic data calendar was limited to wholesale inventories for July, which fell 0.2% (Briefing.com consensus -0.1%) following a revised 0.7% decline in June (from -0.5%), and July consumer credit, which increased by $10.4 billion (Briefing.com consensus $15.8 billion) after a revised increase of $14.0 billion (from $17.9 billion) in June.

• • The key takeaway from the report is that manufacturing demand remains soft, yet conditions in the manufacturing sector, slow they may be, appear to be stabilizing.