Day Traders Diary

5/4/16

The stock market spent the Wednesday session under pressure as vacillating oil prices fueled a retreat in the broader market. Meanwhile, mixed economic data clouded the economic picture while a rebound in the dollar contributed to a risk-off posture. Furthermore, relative weakness from the heavily-weighted industrial (-1.3%), health care (-1.0%), and financials (-0.8%) spaces contributed to selling pressure. The Nasdaq Composite (-0.8%) finished behind both the S&P 500 (-0.6%) and the Dow Jones Industrial Average (-0.6%).

The trading day began on a lower note as investors weighed a slew of economic reports from overseas and the United States. Lackluster readings of Services PMIs from Germany, France, and the eurozone weighed on global equities while a below-consensus reading of the U.S. ADP National Employment Report for April (156,000; Briefing.com consensus 196,000) pushed equity futures back towards their lows.

The cash market found little relief despite an above-consensus reading of the ISM Non-Manufacturing Index for April (55.7; Briefing.com consensus 54.5). The datapoint was masked by a recent string of weaker than expected economic data, which mars prospects of a sharp pick-up in economic growth heading into the second half of the year. Furthermore, renewed pressured from the greenback weighed on dollar-denominated commodities and on the possibility of increased earnings prospects.

The major averages ended off their lows despite seven sectors finishing beneath their flat lines. The commodity-sensitive energy (-1.3%) space traded in-line with industrials (-1.3%) and behind materials (-1.0%), health care (-1.0%), and financials (-0.8%). Conversely, countercyclical utilities (+1.1%), consumer staples (+0.3%), and telecom services (+0.2%) finished with the only gains.

The energy space (-1.3%) sank to the bottom of the leaderboard after investors ruminated over larger than expected builds in crude oil (2.78 million barrels; consensus: 1.69 million barrels) and gasoline (0.53 million barrels; consensus: -0.14 million barrels) stockpiles. WTI crude ended its day higher by 0.3% ($43.78/bbl), but well off its opening level ($44.84/bbl). In the group, Marathon Petroleum (MPC 36.22, -1.77) ended lower by 4.7% as refining names underperformed. On the flipside, Noble Energy (NBL 35.59, +0.38) ended higher by 1.1% after beating bottom-line results for the first quarter.

In the industrial space (-1.3%), airlines continued their recent losing streak as Delta Air Lines (DAL 41.43, -1.49) and American Airlines (AAL 33.21, -1.37) finished with respective losses of 3.5% and 4.0%. Elsewhere, Cummins (CMI 114.44, -4.16) fell 3.5% after a report indicated that class-8 truck orders declined 39.0% year-over-year in April.

Biotechnology underperformed in the health care space (-1.0%), evidenced by the 2.9% decline in the iShares Nasdaq Biotechnology ETF (IBB 258.03, -7.72). The sub-group was led lower by Biogen (BIIB 263.12, -10.59), which extended its May loss to 4.3%. Elsewhere, Anthem (ANTM 138.73, -2.69) fell 1.9% after announcing that CFO Wayne DeVeydt will step down.

The U.S. Dollar Index (93.22, +0.28) finished off its session high, as the greenback gained against the euro, yen, and Canadian dollar. The euro/dollar pair finished lower by 0.1% at 1.1492 while the dollar gained 0.3% against the yen (106.91). Separately, the dollar jumped of 1.2% against the Canadian dollar (1.2873).

The Treasury complex finished on its high as the yield on the 10-yr note fell three basis points to 1.77%. This represents a six basis point move since last Friday's settlement at 1.83%.

Today's participation was above the recent average as more than 992 million shares changed hands on the NYSE floor.

Today's economic data included the weekly MBA Mortgage Index, April ADP Employment Change, preliminary Q1 Productivity, Unit Labor Cost, March Trade Balance, March Factory Orders, and April ISM Services:

The weekly MBA Mortgage Index showed a seasonally adjusted decrease of 3.4%. This compares to last week's -4.1% reading.

The ADP Employment Change report was a disappointment, showing an estimated 156,000 positions were added to private sector payrolls in April (Briefing.com consensus 196,000)

Briefly, the decline in productivity in the first quarter followed on the heels of an upwardly revised decline of 1.7% (from -2.2%) in the fourth quarter.

First quarter productivity declined 1.0% (Briefing.com consensus -1.4%)

Unit labor costs jumped 4.1% (Briefing.com consensus +2.6%), reflecting a 3.0% increase in hourly compensation and a 1.0% decrease in productivity.

On a year-over-year basis, productivity is up just 0.6% while unit labor costs are up 2.3%. That's a relationship with stagflation written on it.

The trade deficit for March narrowed sharply to $40.4 billion (Briefing.com consensus -$41.4 bln) from $47.0 billion in February.

That was a function of imports falling more than exports. Specifically, imports were $217.1 billion, $8.1 billion less than February imports, while exports were $176.6 billion, $1.5 billion less than February exports.

The import weakness was concentrated in consumer goods, which decreased by $5.1 billion on less demand for just about every category of consumer goods, and in capital goods, ex automotive, which decreased by $1.6 billion.

The export weakness also can be traced to consumer goods, which fell by $1.6 billion, yet almost all of that decline was related to lower exports of pharmaceutical preparations (-$0.8 bln) and gem diamonds (-$0.7 bln).

On a year-over-year basis, imports are down 9.2% while exports are down 5.4%.

The month of March marked the 14th straight month that exports have declined year-over-year.

New orders for manufactured durable goods increased 1.1% in March (Briefing.com consensus +0.5%) following a downwardly revised 1.9% decline (from -1.7%) in February.

Excluding transportation, factory orders rose 0.8% after declining 0.9% in February. Shipments increased 0.5% in March, breaking a streak of eight consecutive monthly decreases.

Shipments of nondefense capital goods excluding aircraft -- a metric used in the GDP computation -- also increased 0.5% after declining 1.8% in February and 1.4% in January.

Orders for durable goods increased 0.8% in March while orders for nondurable goods increased 1.5%.

Notwithstanding the overall increase in orders for manufactured goods, new orders for nondefense capital goods excluding aircraft -- a proxy for business spending -- were up just 0.1% after declining 2.7% in February.

Total inventories for all manufacturing industries increased 0.2%, which was the first increase after eight straight monthly decreases. The inventories-to-shipments ratio held steady at 1.37.

The ISM Non-Manufacturing Index for April was better than expected at 55.7 (Briefing.com consensus 54.5) and up from the March reading of 54.5.

It followed on the heels of the ISM Manufacturing Index report for April, which not only fell shy of economists' median estimate but also checked in below the prior month's reading.

The dividing line between expansion and contraction for the ISM Non-Manufacturing Index is 50.0. April marked the 75th consecutive month that it has been above 50.0.

The most important takeaway from the April report is that it reflected faster growth from March. That's important because the non-manufacturing side of the economy is significantly larger than the manufacturing side of the economy, and it's important because this is a second quarter number. Market participants are anxious to see faster growth after real GDP increased at a seasonally adjusted annual rate of just 0.5% in the first quarter.

The improvement in the ISM Non-Manufacturing Index in April was fueled by an uptick in the New Orders Index to 59.9 from 56.7.

In turn, the Employment Index rose to 53.0 from 50.3, marking the second straight month it has been above 50.0.

The Prices Index increased to 53.4 from 49.1, which is an indication that prices increased for the first time in three months.

The biggest drag for the month was the New Export Orders Index, which slipped to 56.5 from 58.5.

Tomorrow's economic data will be limited to Challenger Job Cuts for April and weekly initial claims (Briefing.com consensus 259k), which will be released at 7:30 ET and 8:30 ET, respectively.

Nasdaq Composite -5.6% YTD

Russell 2000 -2.0% YTD

S&P 500 +0.4% YTD

Dow Jones +1.3% YTD