Stocks rallied across the board Monday. Helping boost sentiment was a worse-than-expected reading from the ISM Manufacturing Index. As we have been saying for a while, as long as economic activity continues to outperform expectations, the Fed has more room to raise rates faster, for longer.
This report showed necessary cracks in activity, along with the exact bright points we’d want. Activity slowed to a reading of 50.9% from 52.8%. Readings above 50% connote expanding manufacturing activity, while readings below 50% indicate a contraction.
The other bright point in this report was the Prices Index. Price growth eased to a reading of 51.7% from 52.5%. This is the lowest reading since June 2020 and is down sharply from 82.2% in May.
Now, one report isn’t going to get the Fed to pump the brakes, or even gear down, so it's a speculative rally - especially given what's on deck the rest of this week.
Looking ahead, we will be watching the services index closely on Wednesday, key consumer defensive earnings reports on Thursday, and - of course - payroll data on Friday.
Services
The ISM Non-Manufacturing Index due Wednesday morning is expected to mirror slowdowns found in the manufacturing report.
Services are expected to slow to a reading of 56.0% from 56.9%, after unexpectedly rising last time around. Prices eased to a reading of 71.5% last month, but it remained blisteringly high.
A lower-than-expected reading will likely garner a similar reaction to the manufacturing index, but the devil will be in the details.
The economy showing “cracks” is one thing, but if services has a really ugly reading and flipped to contraction, it may garner a different reaction. Meanwhile, prices are a must-watch because regardless of the headline number, the Fed is battling inflation; and they are doing so with a willingness to hurt the economy near-term to regain control.
The dreams of a so-called “soft-landing”, where economic growth slows instead of contracts and we avoid recessions (or a particularly bad one), need expansion with easing prices.
Jobs Day
Friday’s jobs report will be interesting as fewer jobs are expected to have been added in September with estimates set at 250,000 following August’s growth of 315,000. Meanwhile, the private sector is expected to have added 275,000 jobs following a 308,000 jump in payrolls in August.
The labor market has not only run red-hot throughout the year but has also become the poster boy for an aggressive Fed. We know the Fed is watching the labor market closely as it aims to avoid a wage-price spiral, that would add inflationary pressures.
As was the case with the manufacturing index, and as we expect to be the case with the services index, slower growth is likely better for markets.
Earnings
Earnings reports will be few and far between this week, but Thursday morning’s reports will be worth a follow as both Conagra (CAG) and Constellation Brands (STZ) are slated to report before the open.
Conagra - the maker of Reddi Wip and Hunts tomato sauce - is expected to see its first-quarter earnings per share drop to $0.52 per share following last quarter’s profits of $0.65 per share.
What we are watching out for here is the substitution effect, as last quarter, Conagra said 1) that it expects to further raise its prices over the coming months and 2) that it is already seeing demand weaken due to those hikes. We know that an increasing amount of people are trading down, so the conversation will likely be “was it better-than-feared?”
Meanwhile, Constellation Brands - brewer of Modelo and Corona - is projected to report $2.80 per share following last quarter’s earnings per share of $2.90.
Beer, wine, and spirits companies rose following Boston Beer Co. (SAM) earnings a few weeks back. However, the company did note that consumers were ditching Truly’s for premium light beers - which are cheaper drinks. This rotation may ultimately play into Constellation’s favor as the company noted in its earnings call last quarter that “Total beverage alcohol servings per capita are expected to remain stable with growth of about 1% to 2% annually.”
Economic Events this Week
Tuesday
- 10:00 ET - Factory Orders
- 10:00 ET - JOLTS - Job Openings
Wednesday
- 08:15 ET - ADP Employment Change
- 10:00 ET - ISM Non-Manufacturing Index
- 10:30 ET - EIA Crude Oil Inventories
Thursday
- 08:30 ET - Continuing Claims
- 08:30 ET - Initial Claims
- 10:30 ET - EIA Natural Gas Inventories
Friday
- 08:30 ET - Average Workweek
- 08:30 ET - Avg. Hourly Earnings
- 08:30 ET - Nonfarm Payrolls
- 08:30 ET - Nonfarm Private Payrolls
- 08:30 ET - Unemployment Rate
Earnings Reports This Week
Tuesday:
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Wednesday:
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Thursday:
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Friday:
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