Too Hot. August’s gains are in the past, and all three major indexes are falling as we start the holiday-shortened week. Yes, trade is still an issue as talks with Canada remained in a tough spot, while tariffs on $200 billion of Chinese goods could be put in place as soon as Thursday. But today’s super-strong ISM reading could mean Fed rate increases…and that could be a problem. In today’s Intraday Update, we…
And this porridge is…
The day began with concerns about trade. It might end with worries that the economy is running too hot.
The S&P 500 has declined 0.5% to 2888.12, while the Dow Jones Industrial Average has fallen 116.56 points, or 0.5% to 25,848.26. The Nasdaq Composite has dropped 0.6% to 8059.87.
It’s not for lack of good news. The Institute for Supply Management’s manufacturing index rose to its highest level since 2004, which sounds really good, until one steps back and considers the differences between now and then. “To give a sense of how strong this reading is, only May 2004 has beaten this report in the last 35 years, and that reading came at the end of the first year of recovery from the recession, when PMI readings typically peak,” writes Marketfield’s Michael Shaoul. “August’s reading by contrast comes over nine years into the current cycle and suggests that the US manufacturing sector continues to accelerate, and even if this report proves to be an upside blip the strength of the underlying trend is hard to ignore, with the 12 month ma reaching 59.3, just below its 2004 peak at 59.5.”
If the ISM is correct, then real gross-domestic-product growth could come in around 4.6% during the third quarter, explains MKM’s Michael Darda, well above the Federal Reserve’s estimate of real growth potential. The ninth year of an expansion is not when the Fed wants to see that kind of growth, Darda writes. “Expect sustained Fed tightening to continue unabated until we see a significant break in PMI momentum and, more importantly, the pace of payroll growth,” Darda explains. “This is bullish for the dollar, but not for emerging markets/commodities, which are likely to continue facing strong headwinds (as was the case in the late 1990s).” The U.S. Dollar index has gained 0.5% to 95.588.
That is likely only going to reinforce “the buy U.S.-sell the world” strategy that we’ve been writing about for some time. Capital Economics notes that Markit’s global manufacturing purchasing managers’ index fell to 52.5 in August, down from 52.8 in July—and has been falling since the end of last year. That still suggests that the global economy is growing at a 4% clip, which isn’t too shabby. China, however, saw its PMI drop to 50.6, its lowest in more than a year, at least according to Markit. The official figure rose. “Although the policy easing now underway should eventually provide some support to the economy, the lags involved mean that growth will continue to cool for a while yet,” says Capital Economics. Still, the Shanghai Composite Index rose 1.1% to 2750.58.
Maybe it’s backwards day?
Advanced Micro Devices (AMD) has jumped 7.7% to $27.12 after Cowen raised its price target on the chip maker to $30.
Cognizant Technology Solutions (CTSH) has fallen 3.6% to $75.59 after getting cut to Underperform from Buy at BofA Merrill Lynch.
Qualcomm (QCOM) has risen 2.6% to $69.83 after getting raised to Outperform from Neutral at Macquarie.
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