Day Traders Diary

9/2/16

The stock market trades on a flat note at midday as investors continue to decipher the Employment Situation Report for August. At midday, the Dow Jones Industrial Average (+0.3%) trades neck-and-neck with the Nasdaq Composite (+0.3%) and the S&P 500 (+0.3%). The three indices sport week-to-date gains between 0.3% and 0.4%.

Equities climbed at the start of the session as participants mulled over the August employment report. The report signaled that nonfarm payrolls increased by 151,000, missing the Briefing.com consensus of 180,000. The report also contained a cooler-than-expected reading of average hourly earnings, indicating an increase of 0.1% (Briefing.com consensus +0.2%). Average hourly earnings have ticked higher by 2.4% year-over-year, slipping from last month's reading of 2.6%.

The initial headline reaction to the report sent fed funds futures lower, reducing the implied probability of a rate hike at the September meeting to 18.0% from yesterday's reading of 24.0%. However, participants have since walked back their initial reaction as the likelihood of a September hike rises back to 24.0%. The Treasury complex also erased early gains while the U.S. Dollar Index (95.81, +0.16, +0.16%) hovers near a session high.

The benchmark index has pared gains through the opening half of trade, floating near recently-establish support at the 2173/2176 price level. Eight sectors trade in the green with consumer staples (+0.7%), utilities (+0.8%), and energy (+0.9%) leading the advance. The remaining gainers sport upticks between 0.1% (technology) and 0.5% (materials). Conversely, countercyclical telecom services (-0.1%) and health care (-0.1%) underperform.

The Dow Jones Transportation Average (+0.3%) demonstrates relative strength as shipping companies outperform. Matson (MATX 42.35, +1.17) and Kirby (KEX 53.45, +1.55) top the index, gaining 2.9% and 3.0%, respectively. Conversely, rail names underperform as Union Pacific (UNP 95.13, -0.16) trades lower by 0.2%. The Transportation index sports a week-to-date gain of 1.5%, leading the broader industrial sector (+0.2%; week-to-date: +0.2%) over that time.

The consumer discretionary sector (+0.2%) trades slightly behind the broader market as cruise ship names underperform. Carnival (CCL 46.49, -2.21) trades lower by 4.5% after being downgraded to "Under-Weight" from "Equal-Weight" at Morgan Stanley. Separately, lululemon athletica (LULU 70.06, -6.59) weighs on the retail sector after getting downgraded to "Equal-Weight" at Morgan Stanley. The company reported in-line quarterly results and issued full-year guidance that was a bit light relative to expectations. Conversely, Dow component Home Depot (HD 135.11, +0.88) trades ahead of the price-weighted index.

The heavily-weighted health care sector (-0.1%) trades just beneath its flat line, responding to ongoing concerns regarding drug pricing practices. Democratic Presidential nominee Hillary Clinton recently announced plans to combat "unjustified price hikes" by making alternative medications available and fining drug makers for excessive price increases for long-standing treatments. The iShares Nasdaq Biotechnology ETF (IBB 280.43, -1.01) trades lower by 0.4%, extending its weekly loss to 1.5%. This compares to a week-to-date loss of 0.3% in the broader sector.

The Treasury complex trades lower as the long end of the curve demonstrates relative weakness. The yield on the 2-yr note is flat at 0.79% while the yield on the benchmark 10-yr note has increased two basis points to 1.59%.

Today's economic data included the Employment Situation Report for August, the Trade Balance for July, and Factory Orders for July:

The August employment report showed a deceleration in the labor market from recent months.

Nonfarm payrolls increased by 151,000 (Briefing.com consensus 180,000). Over the past three months, job gains have averaged 232,000 per month.

July nonfarm payrolls revised to 275,000 from 255,000

Private sector payrolls increased by 126,000 (Briefing.com consensus 175,000)

July private sector payrolls revised to 225,000 from 217,000

Unemployment rate was 4.9% (Briefing.com consensus 4.8%) versus 4.9% in July

Persons unemployed for 27 weeks or more accounted for 26.1% of the unemployed versus 26.6% in July

August average hourly earnings were up 0.1% (Briefing.com consensus 0.2%) after being up 0.3% in July

Over the last 12 months, average hourly earnings have risen 2.4% versus 2.6% for the 12-month period ending in July

The average workweek was 34.3 hours (Briefing.com consensus 34.5) versus 34.4 hours in July

The labor force participation rate was 62.8% versus 62.8% in July

The July Trade Balance Report showed a narrowing in the trade deficit to $39.5 billion (Briefing.com consensus -$43.0 billion) from a downwardly revised $44.7 billion deficit (from -$44.5 billion) for June.

Net exports will provide a positive contribution to third quarter GDP as the real trade deficit of $58.3 billion for July was 4.3% less than the second quarter average.

New orders for manufactured goods increased 1.9% in July (Briefing.com consensus +2.0%) following a downwardly revised 1.8% decline (from -1.5%) for June. Excluding transportation, orders were up 0.2% after a 0.4% increase for June.

Transportation equipment orders (and particularly nondefense aircraft and parts orders ) drove much of the strength in July factory orders.