It’s kind of a gray day in Detroit. It’s pouring. The stock market kind of matched today’s ugliness at the end of last week. What goes up must come down.
As usual, this report includes analysis from Econoday.1 Let’s touch on these reports!
ISM Manufacturing Index
One of the most-followed manufacturing indexes posted its best number since January of last year in August, coming in at 56, up 1.4 points. As a reminder, a number over 50 indicates growth in the sector. The number easily beat expectations.
At least part of this is driven by how deeply manufacturing contracted as a result of government shutdowns, but the numbers are still good. New orders were at a very high 67.6 on the scale. Backlogs were also up almost 3 points to 54.6. This is encouraging because factories may be looking to hire to cut into the backlog.
However, the bad news is that we aren’t there yet. People are still being laid off, although at a slower pace. Sentiment is up 2.1 points, but at 46.4, this still falls below the breakeven level.
However, the rest of the report was positive, with inventories falling, prices for materials rising and supplier deliveries slowing down. All of this is a sign of higher demand, but it would be good to see the employment number improve.
MBA Mortgage Applications
Mortgage applications were down 2% last week on a seasonally adjusted basis and fell 3% overall. Refinance applications were down 3%, but they’re still 40% higher than they were at the same time a year ago. On the purchase side, applications also fell 3%, but were 28% higher than year-ago levels.
Rates still remain favorable according to this index, falling 3 basis points to 3.08%.
The U.S. trade deficit ballooned in July, up $10.1 billion to $63.6 billion. What’s more, numbers in July were revised so that the deficit increased $2.8 billion.
Big increases in imports drove the increase. There’s been a major recovery in worldwide production of cars and trucks, and $7.7 billion of the increase came in the form of auto imports. Capital goods and industrial supplies were also up, with a sizable uptick in imports of civilian aircraft.
Automotive gains weren’t limited to the import side with exports of vehicles also up $7.7 billion. Gains were smaller when it came to capital goods, industrial supplies and food as well.
You could be forgiven if in the deluge of news we’re exposed to now you missed the re-heating of trade tensions between China and the U.S. It’s a back-and-forth that has been intensified by rhetoric around COVID-19. The latest numbers show that the trade deal hasn’t had much of an effect. The U.S. still has a $28.3 billion deficit with China.
America still maintains a sizable surplus when it comes to services, despite it being down $800 million at $17.4 billion.
I never thought I would type the following sentence: There was serious controversy sparked last week with the release of new unemployment claims. To understand why, we should probably back up a bit.
A couple of weeks ago, the Department of Labor announced it would be making a change to claims calculations to prevent the large levels of jobless claims that we’ve seen from COVID-19 from completely throwing off seasonal adjustment in the future.
However, the questions started when the report was released last Thursday. Although the formula was changed, they didn’t apply the new formula to previous reports from the last year, preventing true comparison and apparently leading to seasonally adjusted numbers that were skewed lower last week.
The Department of Labor seemingly doesn’t plan to adjust prior weeks until the beginning of next year when it conducts its annual review of seasonal adjustment factors.
To give you an idea as to the incongruity here, on a seasonally adjusted basis, initial claims were down 130,000 to come in at 881,000. Meanwhile, the 4-week moving average of initial claims was down 77,500 at 991,750.
When we take a look at the unadjusted numbers, there were 833,352 claims for unemployment insurance at the state level (not counting those who qualify for special pandemic unemployment assistance that ends January 1). Although the number looks smaller, it actually represents an uptick of 7,591 from the week before. No 4-week average is included.
An accurate seasonal adjustment has real value because it takes out normal ups and downs associated with changes in retail seasons and the fact that the majority of teachers have the summer off. (Side note: It’s the first day back at school for many here in Michigan. Good luck to teachers across the U.S. adapting to our new world!)
Until the calendar turns to January, I’m going to include both seasonally adjusted and unadjusted numbers. This should give us some basis for a week-to-week comparison.
On a seasonally adjusted basis, continuing claims were down 1.238 million to 13.254 million. The unemployment rate fell 0.8 points to 9.1%. Meanwhile, on an unadjusted basis, the unemployment rate was 9%, which was down 0.5%. Those claiming longer-term benefits were down 764,713 to 13.104 million.
The unemployment rate fell 1.8% to 8.4% in August according to the latest jobs report. The U.S. economy saw 1.371 million jobs added to nonfarm payrolls. This included 1.027 million jobs added to private payrolls and 344,000 jobs added in the public sector, boosted by the hiring of 238,000 workers to take the census.
Breaking down the gains by industry, 29,000 jobs were added in manufacturing. There were 16,000 jobs opened up in construction. Auto dealers went on a bit of a hiring spree, adding 22,000 jobs, contributing to retail trade jobs which were up 248,900 overall. Leisure and hospitality jobs were up 174,000 with a 197,000 increase in professional and business services jobs.
We still have a bit to go as jobs numbers are 11.5 million below where they were in February before COVID-19. Mining employment also continues to head in the wrong direction, down 2,000, as the industry has been heavily affected by the virus.
Looking at a couple big-picture numbers, the labor force participation rate was up 0.3% to 61.7%, while there was a 0.4% uptick in average hourly earnings in August. They’ve gone up 4.7% on the year. The average workweek was also 6 minutes longer at 34 hours, 36 minutes.
Movements in mortgage rates were a bit mixed last week. They still remain incredibly low if you’re looking to purchase or refinance. If you’re interested, speak to one of our Home Loan Experts.
The average rate on a 30-year fixed mortgage with 0.8 points paid in fees was up a couple of basis points to 2.93%, down from 3.49% at the same time in 2019.
Meanwhile, the average 15-year fixed mortgage rate with 0.8 points paid dropped 4 basis points to settle at 2.42%. This has dropped from 3% a year ago.
Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable rate mortgage was up 2 basis points to 2.93% with 0.2 points paid, which has fallen from 3.3% last year.
The market for tech stocks has been as hot as any for a while now. You could equate this to heating something in the microwave. The rapid temperature increase is somewhat analogous to the rise we’ve seen in stock prices lately.
Every once in a while, the market takes a deep breath and lets the food cool before burning the roof of its mouth. While tech has driven a ton of growth recently, the market is looking at the actual value of these companies a little more closely. They’re still attractive investments in many cases, but not to the point of market irrationality.
The correction in tech stocks drove markets quite a bit lower last week, with the big five – Alphabet, Amazon, Apple, Facebook and Microsoft – all falling sharply and driving the broader market indexes down.
The Dow Jones Industrial Average was down 159.42 points Friday to finish at 28,133.31, falling 1.04% for the week. Meanwhile, the S&P 500 finished the day at 3,426.96, falling 2.31% on the week and 28.1 points on the day. Finally, the Nasdaq fell 3.38% for the week, down about 1.3% for the day at 11,313.13.
The Week Ahead
Wednesday, September 9
MBA Mortgage Applications (7:00 a.m. ET) – The mortgage applications index measures applications to mortgage lenders. This is a leading indicator for single-family home sales and housing construction.
Thursday, September 10
Jobless Claims (8:30 a.m. ET) – New unemployment claims are compiled weekly to show the number of individuals filing for unemployment insurance for the first time. An increasing trend suggests a deteriorating labor market. The 4-week moving average of new claims smooths out weekly volatility.
Producer Price Index (PPI) (8:30 a.m. ET) – The Producer Price Index measures the average change over time in prices received by domestic producers for the sale of goods and services.
Friday, September 11
Consumer Price Index (CPI) (8:30 a.m. ET) – The consumer price index measures changes based on the price of a fixed basket of goods and services purchased by consumers.
It’s a short week and there’s not too much coming out, but we do get a look at the new jobless claims measurement as well as inflation numbers. We’ll have it all covered for you next week in Market Update!
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