Stocks Start the Quarter on a Mostly Positive Note…..
On the first day of Q3, U.S. stocks closed mostly higher, continuing where Q2 left off, extending the sharp bounce off of the March lows, courtesy of a plethora of upbeat global manufacturing reports, headlined by an unexpected jump in the ISM Manufacturing Index back into expansion territory. Moreover, festering uncertainty regarding the implications of the recent surge in new COVID cases is being countered by upbeat study results of Dow member Pfizer’s and partner BioNTech’s vaccine candidates. However, ADP’s employment figures missed ahead of tomorrow’s key June nonfarm payroll report. The minutes from the Fed’s June monetary policy were released with the Committee again emphasizing the uncertainty that COVID-19 presents to an economic recovery, and that the available information suggests that U.S. Real GDP would likely post a historic decline in Q2. Treasury yields ticked higher as bond prices dipped and the U.S. dollar fell. Crude oil prices were higher, while gold was lower. FedEx topped quarterly estimates, Macy’s offered some commentary on its business trends, Constellation Brands posted bested revenue forecasts, Dow component Boeing remained volatile, and Beyond Meat is beginning grocery sales in China. Europe finished mostly lower, while Asia closed mixed.
The Dow Jones Industrial Average fell 78 points (0.3%) to 25,735, the S&P 500 Index increased 16 points (0.5%) to 3,116 and the Nasdaq Composite advanced 96 points (1.0%) to 10,155. In moderately-heavy volume, 928 million shares were traded on the NYSE and 4.6 billion shares changed hands on the NASDAQ. WTI crude oil advanced $0.55 to $39.82 per barrel and wholesale gasoline increased $0.02 to $1.22 per gallon. Elsewhere, the Bloomberg gold spot price fell $8.92 to $1,772.05 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.3% at 97.11.
Manufacturing returns to expansion, ADP jobs data misses but prior month revised sharply higher
The June Institute for Supply Management (ISM) Manufacturing Index unexpectedly jumped back into expansion territory (a reading above 50), rising to 52.6 from May’s unrevised 43.1 level, and versus the Bloomberg forecast of 49.8. The index hit the highest level since April 2019 as new orders and production both bounced sharply to levels well north of the key 50 mark, while employment and new export orders both rose solidly but continued to depict contraction. The ISM said June signifies manufacturing entering an expected expansion cycle after the disruption caused by the coronavirus (COVID-19) pandemic, as comments from the panel were positive, reversing the cautious trend which began in March.
The final June Markit U.S. Manufacturing PMI Index was unexpectedly revised higher to 49.8 from the preliminary level of 49.6, where it was forecasted to remain, and above May’s 39.8 level. A reading below 50 denotes contraction. The release is independent and differs from ISM’s report, as it has less historic value and Markit weights its index components differently, while it surveys a wider range of companies.
Today’s manufacturing reports adds to similar upbeat data out of China, the Eurozone and U.K. to bolster optimism of progress in economic activity from the COVID-19 disruption.
The ADP Employment Change Report showed private sector payrolls rose by 2,369,000 jobs in June, south of the Bloomberg forecast calling for a 2,900,000 gain, while May’s tumble of 2,760,000 jobs was revised to a 3,065,000 rise.
The MBA Mortgage Application Index declined 1.8% last week, following the prior week’s 8.7% drop. The decrease came as the Refinance Index declined 22%, joining a 1.3% dip for the Purchase Index. The average 30-year mortgage rate edged 1 basis point (bp) lower to 3.29%.
Construction spending surprisingly fell 2.1% m/m in May, versus projections of a 1.0% gain, and following April’s negatively-revised 3.5% drop. Residential spending fell 3.9% m/m and non-residential spending declined 0.9%.
Finally, in afternoon action, the Federal Reserve released the minutes from its June monetary policy meeting that resulted in a dovish tone of its monetary policy decision, updated economic projections and commentary from Chairman Jerome Powell. The report further emphasized the uncertainty that COVID-19 poses to the U.S. economy and noted, “U.S. Real GDP would likely post a historically large decline in the second quarter.” Additionally, the report showed various participants believed that the economy might need the support of a highly accommodating policy for some time, and that the Fed should provide clearer forward guidance, however, a couple of participants had the concern that policies that effectively committed the Committee to maintaining low rates for an extended period could ultimately pose risks to financial stability. Lastly, the Fed reiterated its commitment to using its full range of tools to support the U.S. economy in this challenging time. However, it did attach very little probability that negative rates would be used as a policy tool.
Treasuries were lower, as the yield on the 2-year note ticked 1 bp higher to 0.16%, the yield on the 10-year note gained 2 bps to 0.67%, and the 30-year bond rate rose 1 bp to 1.42%.
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