Daily Market Color

Service Sector Data Prompts Rise in Treasury Yields and Equities

Treasury yields and stock prices rose today after US investors received a plethora of economic data in the early part of the trading session.  The August U.S. trade deficit increased by three percent to $40.7 billion after the highest level of imports since September 2015 more than offset the 0.8% rise in total exports.  Robust domestic demand for capital goods led to the widening of the trade gap contrary to the consensus expectation which had called for a $300 million narrowing.  The ADP employment report showed private payroll growth for September, but at a slightly slower pace than expected.  Often taken as a preview for the monthly nonfarm payrolls, private jobs increased by 154,000 where a 165,000 gain was expected, following a downward revision to 175,000 for August.  Forecasts for Friday’s monthly employment release anticipate 173,000 increase in jobs for the month.  Perhaps the most impactful data release on the day was the ISM Non-Manufacturing Index, which reported a quite healthy 57.1 September level that strongly rebounded from the prior month’s 51.4 and supported the notion that the weaker August figure was essentially an outlier in the manufacturing and services segments.  New orders added 9 points getting to the 60.0 level, providing the largest uptick for the index, which reached its highest mark in eleven months.  

Also contributing to the rise in stocks, a fifth consecutive weekly drawdown in U.S. crude inventories guided the price for a barrel of WTI crude oil towards $50, its highest mark since June.  The 3 million barrel fall in inventories for last week added to a surprisingly high total September draw that finished at 26 million barrels.  Investors expect the drawdown to continue into this week with Hurricane Matthew likely to disrupt production.

Overseas, major European equity markets closed down on the day, largely impacted by reports that indicate an intent to taper the QE program administered by the European Central Bank over the next few months.  With its current bond buying program ending in March 2017, the ECB is rumored to be in discussion over the best course of action to gradually reduce its $80 billion euro per month purchases.  Despite an ECB spokesperson denying the contents of the article published by Bloomberg, regional bond yields have jumped along with the demand for the euro, which has hit three-week highs against the yen and five-year highs against the pound. 
All three main U.S. stock indexes are currently up 0.50%-0.75% on the day while Treasury yields/swap rates are 2-4 bps higher across all major maturities.  WTI crude is up 2.25% to a price of $49.80/ barrel, and Brent crude has gained 1.90% to $51.85/barrel. 

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