Middle East, Ports, ISM, Send Inflationary Signals: Oct. 3, 2024

Intensifying geopolitical hostilities have investors reaching for their risk-off playbook, but scorching US economic data and continued labor disputes on the East and Gulf coasts are serving to cloud the outlook, sending yields north. Market participants are awaiting another violent response in the Middle East while bidding up crude oil futures, energy and utilities stocks and equity index pullback insurance as a result. Meanwhile, rates are jumping due to an unresolved port situation and this morning’s huge upside beat on ISM-services, which notched its hottest level in 19 months while the pivotal prices paid component rose to its loftiest height since January. Subdued unemployment claims released earlier also served to temper recession fears together with the ISM, pushing back on Fed rate cut projections but bumping up inflation expectations.

Servicers Report Robust Sales, Weak Hiring

A pullback in headcounts didn’t stop servicers from fulfilling increasingly thick order books, with this morning’s Purchasing Managers’ Index for Services from the Institute of Supply Management (ISM) rising to its highest figure since February 2023. September’s result of 54.9 trounced expectations of 51.7 as well as August’s 51.5, driven by sharp increases in demand and business activity. Indeed, the new orders and production components rose to 59.4 and 59.9, but firms did have to raise charges, with the prices paid segment accelerating to 59.4. Employment did offset some of the positivity; however, coming in at 48.1, as uncertainty in the political arena has kept the lid on recruiting efforts.

Past performance is not indicative of future results

Little Hiring, Little Firing

Firms are certainly reducing their rates of hiring, but they have avoided large-scale firings so far this cycle. The weekly unemployment report reflected continued strength in the labor market, with initial claims coming in at 225,000 for the week ended September 28, slightly above the median estimate of 220,000 and the previous week’s 219,000. Furthermore, continuing claims arrived at 1.826 million for the week closing on September 21, essentially unchanged from the prior period’s 1.827 million. Four-week moving average trends ticked south on both fronts, from 225,000 and 1.834 million to 224,250 and 1.829 million.

Past performance is not indicative of future results

Geopolitics, Ports Weigh on Stocks

Markets are mixed as investors navigate an uncertain landscape in the Middle East and in Washington while they are also patiently awaiting tomorrow’s payroll jobs Friday. This month has been a down one for equities so far, but market bulls are trying to turn it around similar to how they successfully reversed what was a negative September. Stocks are continuing to pare some of last month’s gains today, with all major stateside indices lighter on the session. The Russell 2000, Dow Jones Industrial, S&P 500 and Nasdaq 100 are suffering losses of 0.8%, 0.6%, 0.3%, and 0.2%. Sectoral breadth is also negative with 8 out of 11 industries lower, weighed down by consumer discretionary, materials and real estate, which are all losing 1.1%. But traders are scooping up names in the energy, technology and utilities spaces, with those areas up 0.8%, 0.5%, and 0.1%.

Inflationary Signals Send Yields North

Yields, the greenback and certain commodities are rising in response to a tricky Middle East situation and resurfacing concerns about price pressures on the back of ISM-Services and a lack of progress at the ports. Treasurys are being sold with the 2- and 10-year maturities changing hands at 3.69% and 3.83%, 4 basis points (bps) heavier on the session. The Dollar Index is taking its cue from rising rates and stronger economic performance on a relative basis. The gauge of the US currency is up 44 bps as it gains versus all of its major counterparts including the euro, pound sterling, franc, yen, and Aussie and Canadian tenders. Commodities are mostly higher, with crude oil, silver and lumber up 2.7%, 1.1%, and 0.3%, while copper is down 2.7%, and gold remains near its flatline. WTI crude changed hands at $73.92 per barrel today, its highest level since September 3.

Hedge Elections Outcomes Today!

October has been a weaker month for stock bulls with conditions worsening in the Middle East and at the ports. And while rising hostilities could have been expected by some market participants, the crisis on the coasts took many, including myself, by surprise.