Is unemployment set to rise in the coming months?

Highlights:

Market Recap: The market dropped more yesterday as the S&P 500 (IVV) finished down -1.79%. The VIX volatility index closed above 20, up over 10%. Gold also surged, closing higher by 1.17%. Surprisingly, copper was also up on the day, moving higher by 0.39%. Crude oil continued its plunge, finishing down -1.83%.

Economic Data: The ADP private payrolls rallied 0.02% month-over-month. This is demonstrative of slowing payroll growth and indicates that the slowing economic growth is spilling over into employment. Is unemployment set to rise in the coming months?

Copper: Copper was a bright spot in an otherwise gloomy market yesterday. However, copper is holding below the 200-day moving average and remains in a negative trend. A move higher in copper could be a positive sign that global economic growth is nearing a bottom.

Emerging Markets: Emerging markets (EEM) rallied over 1% against the S&P 500 yesterday. EEM is up almost 2% relative to the S&P 500 (SPY) this week. This is a positive divergence. This ratio tends to peak and bottom prior to the S&P 500. Are emerging markets bottoming now?

Small Caps: Small caps moved higher against large caps yesterday (IJR/SPY). This is another positive divergence that suggests the move lower in equities may find some relief. One would expect small caps to continue to deteriorate relative to large caps in a classic risk off move.

High Yield: High yield dropped more than -0.80% against long-term Treasuries. This ratio has made a series of lower highs and lower lows since the end of 2018. The ratio remains below the 200-day moving average and is indicative of a defensive posture among fixed income participants. A break to new lows for this ratio could suggest that credit risk is on the rise.

Chart of the Day: ISM matters for equities. The chart below from Nordea and Macrobond demonstrate the relationship between ISM manufacturing new export orders and the rate of change of U.S. equities markets. We should all hope the correlation between these two have broken down permanently. Otherwise, we could be in for a wild equity market ride.

 

Futures Summary:

 

News from Bloomberg:

Democrats kept up a blistering pace in the impeachment process. Former special envoy to Ukraine Kurt Volker will testify to lawmakers behind closed doors today, the first of five current and ex-State Department officials. Three House committee chairs said they're concerned about apparent efforts inside and outside the administration to focus on specific officials, including Joe Biden.

Economic concerns are mounting. Today we'll get a key indicator of the U.S. services industry, which may have slipped last month, adding to recession concerns. Initial jobless claims probably edged up last week to 215,000. Over in Europe, data showed the economy stalled at the end of the third quarter.

The dismal news hasn't convinced Chicago Fed chief Charles Evans to cut rates again. Consumer spending and jobs are strong and he's open minded about the next meeting, at which he'll vote. "Whether one more rate cut at this point is the right decision or not, I think we're just going to have to go into the meeting and see." Traders are pricing in a 78% probability of a 25 basis point cut.

Retail roundup: PepsiCo's earnings beat and it expects to meet or exceed full-year revenue growth targets. GoPro plunged after cutting its forecast. In Europe, H&M surged after an earnings rebound, but Ted Baker tumbled after warning its performance may worsen. The health of beer and the sale of wine assets will be eyed at Constellation. Costco reports post-market.

Treasury yields extended losses before more U.S. economic data. American stock-index futures signaled gains after a two-day rout and the dollar fell. A stronger yen hammered Tokyo, while Hong Kong shares bucked regional losses on speculation the government may ban face masks to deter protesters. Gold advanced. Oil slipped.