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All Eyes on ISM Services: Cues to Market Direction

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Thursday, October 3, 2019

Another Thursday, another Initial Jobless Claims headline: 219K remains within the very favorable range of 200-225K new claims on the week, consistent with a robust U.S. labor environment. This amounts to 4000 claims higher than the upwardly revised 215K from the previous week.

Continuing Claims stay at near-half-century lows to 1.651 million, lower from the previous week and now beneath 1.7 million — again consistent with historically healthy employment — for the past six weeks, and average beneath that threshold going back several months. Regardless what surprises tomorrow’s U.S. government non-farm payroll survey says, these weekly claims numbers remain among the most strongly consistent of the entire late-stage bull market.

That said, the Dow Jones has shed 800 points in the past two trading sessions — effectively wiping out all gains from the month of September in less than half a week. Going back into late last month, we’ve now seen losses on the major U.S. indexes in 4 of the past 5 trading days. Fears of global economic weakness now intermingle with political concerns here at home to push investors into booking profits near term, likely looking for better entry points should the markets fall further.

Key to economic data yet to be reported today is the ISM Non-Manufacturing survey for September, following the near-disaster in ISM Manufacturing earlier this week, which showed clear contraction in the goods-producing segment of the U.S. economy and the worst manufacturing headline in the past decade. Should Services prove to be sliding anywhere near as badly, investors will be faced — for the first time in years — with the real prospect of a market downturn, even toward the dreaded “R” word.

However, though we’ve seen difficulties in the Manufacturing sector since the positive affects of the Trump tax cut wore off, consumer confidence has more than picked up the slack in Services. Keep in mind we have finally been seeing average earnings growth for wages in the jobs data — again pointing to the importance of tomorrow morning’s report — and this has begat strength in consumers’ perceived buying power. There’s nothing currently asserting this should change… unless Services data goes notably lower today, as well.

Tesla Reports Record Deliveries, Still Misses

Last evening, new Tesla (TSLA - Free Report) auto delivery numbers came in, with a record 97K reported for the quarter. This is roughly a month ahead of Tesla’s earnings report, which helps investors digest the numbers the company reports by putting out delivery estimates ahead of time. However, expectations were for 99K new deliveries to have been made over the time period. Shares are down 5% on the news.

Tesla has a new Shanghai plant expected to come online this month, which is expected to build as many as 1000 cars per week. But new plants never produce at optimum levels immediately, and considering Tesla’s track record of over-promising deliveries and under-reporting, no one should be under the impression this new China plant will solve all the company’s problems. Added to this, the Chinese consumer is feeling the affect of the ongoing trade war with the U.S. more than the American consumer is, and Chinese nationals are buying fewer cars these days.

All in all, challenges remain. Welcome to the real world. Nothing at this stage looks insurmountable, but it will pay to keep our eyes open to data ahead of the deluge of Q3 earnings expected in the next couple weeks.

Mark Vickery
Senior Editor

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