August Bull Run Continues…..

U.S. equities finished higher to keep the positive start to August intact, with stronger-than-expected July services sector reports continuing to suggest a recovery in economic activity. Moreover, reports of progress being made on a tenuous fiscal relief package appeared to also lend support. However, ADP reported much softer-than-expected private sector job growth to keep the enthusiasm in check, but a large upward revision to June’s job growth tempered the disappointing July figure. Earnings continued in earnest, with Dow member Walt Disney rallying despite posting mixed results, while CVS Health and Activision Blizzard were lower amid scrutiny of their reports. M&A activity was also in focus, as Teladoc Health and Livongo Health announced a merger agreement valued at about $18.5 billion, while Dow component Johnson & Johnson reported an agreement to supply 100 million doses of its COVID-19 vaccine candidate in the U.S. Treasury yields rebounded as bond prices slipped and the U.S. dollar remained in a soft patch, while gold continued to rally and crude oil prices gained ground in the wake of some bullish oil inventory data. Europe finished mostly higher, while markets in Asia were mixed.

The Dow Jones Industrial Average rose 373 points (1.4%) to 27,202, the S&P 500 Index increased 21 points (0.6%) to 3,328, and the Nasdaq Composite gained 57 points (0.5%) to 10,998. In moderate volume, 900 million shares were traded on the NYSE and 4.1 billion shares changed hands on the NASDAQ. WTI crude advanced $0.49 to $42.19 per barrel and wholesale gasoline was up $0.01 at $1.22 per gallon. Elsewhere, the Bloomberg gold spot price advanced $18.66 to $2,037.87 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.6% lower to 92.84.

Services sector output higher than expected, ADP job report misses, trade deficit narrows…..

The July Institute for Supply Management (ISM) non-Manufacturing Index showed expansion in the key services sector (a reading above 50) unexpectedly accelerated to 58.1 from June’s 57.1 level, well above the Bloomberg forecast of a decline to 55.0. The index showed the fastest rate of expansion since February 2019 as the new orders component jumped 6.1 points to 67.7, the business activity portion ticked higher to 67.2 from 66.0, and backlog of orders increased 4.0 points to 55.9. However, employment dipped to 42.1 from 43.1. The ISM said respondents remain concerned about the pandemic; however, they are mostly optimistic about business conditions and the economy as businesses continue to reopen, while sentiment varied across industries as they are impacted differently.

The final Markit U.S. Services PMI Index for July was revised higher to 50.0—the demarcation point between expansion and contraction—from the preliminary estimate of 49.6, where it was expected to remain. The Index improved from June’s 47.9 figure, but below the 53 reading a year ago. Markit’s release is independent and differs from the ISM report, as it has less historic value and Markit weights its index components differently, while its survey respondents include those that vary more in company size, including the small and medium-sized companies.

The ADP Employment Change Report showed private sector payrolls rose by 167,000 jobs in July, well below forecasts calling for a 1,200,000 gain, but June’s rise of 2,369,000 jobs was revised to a 4,314,000 increase. Today’s ADP data, which does not include government hiring and firing, comes ahead of Friday’s broader July nonfarm payroll report, expected to show headline and private sector employment rose by 1,500,000 economic calendar. The unemployment rate is forecasted to decline to 10.5% from 11.1% and average hourly earnings are projected to decrease 0.5% month-over-month (m/m), and be up 4.2% y/y.

The trade balance showed that the June deficit narrowed, coming in at $50.7 billion versus May’s upwardly-revised deficit of $54.8 billion from the originally-reported $54.6 billion, and compared to expectations of $50.2 billion.

The MBA Mortgage Application Index declined 5.1% last week, following the prior week’s 0.8% decrease. The drop came as a 6.8% fall in the Refinance Index was met with a 1.8% decrease for the Purchase Index. The average 30-year mortgage rate fell 6 basis points (bps) to 3.14%.

Treasuries were lower, as the yield on the 2-year note was flat at 0.11%, while the yields on the 10-year note and the 30-year bond rose 4 bps to 0.55% and 1.23%, respectively.

Treasury yields rebounded from some renewed pressure as the markets grapple with uncertainties regarding the sustainability of the economic recovery amid flared-up new cases of COVID-19 and the fiscal fight in Congress, but the Fed has continued to stress its willingness to use all of its tools to combat the pandemic’s severe disruption.

© 2020 Charles Schwab & Co., Inc.

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