LIVE MARKETS-Land, ho! Data signals return to economic normal


* Dow, S&P 500 edge up; Nasdaq slightly lower

* Energy leads S&P 500 sector gainers; cons disc weakest group

* Euro STOXX 600 index down ~0.7%

* Dollar, gold down; crude, bitcoin up

* U.S. 10-Year Treasury yield ~1.29%

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A wave of hump-day data crashed ashore on Wednesday, bringing with it increasing signs that the U.S. economy is finding its land legs after being tossed about by the tempest of the pandemic.

Industrial production growth slowed down as expected in August, meeting consensus by growing 0.4%, half the pace of July's 0.8% growth.

The report from the Federal Reserve also showed manufacturing output fell short of forecasts, inching up a meager 0.2% versus the 0.4% increase expected.

But capacity utilization , a measure of economic slack, grew to 76.4%, inching above pre-pandemic levels for the first time since mandatory shutdowns to contain COVID-19 brought the global economy to its knees.

"Both total and manufacturing output have made a full recovery from pandemic-related losses," writes Rubeela Farooqi, Chief U.S. economist at High Frequency Economics. "Growth in manufacturing going forward is likely to be supported by low inventories. But supply issues and shortages remain a constraint for now that are preventing a stronger rebound."

Factory activity in New York State kicked into overdrive last month.

The New York Fed's Empire State index delivered a reading of 34.3, a sharp acceleration from July's 18.3.

Analysts expected the index to tick lower to an even 18.

An Empire State reading above zero indicates expansion.

While new orders and employment rebounded, some of the increase was unfortunately driven by components associated with supply chain challenges, namely delivery times and prices received.

"These components indicate that supply chain disruptions remain severe," notes Ian Shepherdson, chief economist at Pantheon Macroeconomics, who adds that "the situation is no longer deteriorating at an accelerating pace."

The prices Americans pay for imported goods unexpectedly decreased in August, according to the Labor Department.

Import prices pulled back by 0.3% instead of increasing by that amount as seen by the mean forecast.

Year-over-year, import prices cooled, shedding 1.3 percentage points to come in at a still-elevated 9%.

"Looking ahead, import price inflation will remain sticky in the near term until virus disruptions are resolved," says Mahir Rasheed, U.S. economist with Oxford Economics (OE). "However, decelerating import price inflation confirms that price dynamics will continue normalizing on fading base effects, softer domestic demand, and a steady dollar."

The graphic below, which shows major indicators against the Fed's average annual 2% inflation target, looks like a cresting wave and suggests the worst of the re-opening price spikes are behind us.

Finally, the Mortgage Bankers Association (MBA) delivered the happy news that demand for home loans inched up last week.

A 7.5% increase in applications for loans to purchase homes

uncharacteristically did the heavy lifting, while refi demand , which represents the lions share of the total, inched lower.

The average 30-year fixed contract rate held its ground at 3.03%.

Lest we get too excited, however, OE's lead economist Nancy Vanden Houten reminds us that mortgage demand data is usually volatile during holiday weeks. What's more, she writes that while "underlying demand, still-low mortgage rates and a small increase in the inventory of existing homes," supplies remain "historically tight," and record prices are putting home ownership beyond the reach of many potential buyers.

Wall Street continues to dance the value/growth pivot tango, once again favoring value stocks which stand to gain the most from economic revival.

The Dow and the S&P 500 are green, but the Nasdaq is slightly lower.

(Stephen Culp)



The wider adoption of autonomous vehicles on highways in the United States will take several decades, posing little threat to auto insurers who rely heavily on personal auto insurance policies, J.P.Morgan analysts said on Wednesday.

Investors fear that as more self-driving cars take to the roads, it could shift the liability of accidents from individuals to auto manufacturers, thereby reducing the need for individuals to sign up for personal auto insurance.

Indeed, the rise in accidents involving self-driving cars has brought driver assistance systems under the National Highway Traffic Safety Administration's radar.

However, JPM's Jimmy Bhullar dismissed concerns over vehicle owners being absolved of liability, saying that such a shift would require a major regulatory overhaul.

"The introduction of autonomous vehicles should reduce accident frequency over time but could drive an uptick in frequency initially as human drivers try to adapt to vehicles with unfamiliar driving tendencies," Bhullar said in a note.

Top insurers Allstate Corp and Progressive Corp

are most susceptible to any changes once autonomous vehicles become more prevalent, but they are well positioned to weather the change, JPM analysts said.

Major U.S. auto insurers including Travelers Companies Inc

and State Farm have already seen a fall in auto insurance claims since the start of the pandemic as Americans stayed at home under widespread orders to help contain the spread of the virus.

(Tanvi Mehta and Noor Zainab Hussain)



With workers in short supply and inflation on everybody's mind, Barclays head of investment sciences Ryan Preclaw finds that companies that rely on paying low wages have underperformed higher-paying counterparts.

So the firm recommends selling stock in the companies most exposed to the low-wage factor as the biggest wage gains are occurring in the lowest-paying industries.

In the past four months they observe that the lowest-paying companies have underperformed with a "statistically significant relationship between the share of a company’s employees being paid well below the median wage and stock performance since the end of April 2021," citing data from Revelio.

Companies lagging include those with more than 80% of workers making less than $87,000. Barclays also cautions against

hope that the end of federal unemployment insurance supplement in August would lead to an influx of workers, saying that "the evidence suggests otherwise."

Barclays suggests tilting away from low-paying companies or pairing "shorts in names more exposed to low wages with longs in similar names that pay at the higher end of the scale."

It says to sell a basket of the 150 low-paying names, which has lagged the S&P 1500 by about 3% since the end of April and is expected to keep underperforming as wage pressures intensify.

For example, it suggests selling Cracker Barrel Old Country store and buying Starbucks Corp , selling Addus Homecare and buying Mednax , selling Heartland Express and buying Union Pacific selling Illinois Tool Works and buying Rockwell Automation

and says to sell MGM Resorts International and buy Host Hotels & Resorts .

(Sinéad Carew)



The latest bout of weakness in U.S. stocks is following a pattern that has become all too familiar to options market watchers.

While stocks have traded higher for months now, scaling one record after another, it has not been without the occasional wobble, most of which have occurred around options expiration weeks.

Once a month, on the third Friday of every month, millions of options contracts on stocks, ETFs and indexes expire, leading to a change in options dealers' trading behavior.

Options dealers are considered long or short gamma depending on whether they have bought or sold options. To manage their risk they may continuously hedge by buying and selling stocks, futures and options.

When dealers are long S&P 500 index gamma, rising stocks lead them to sell equities or futures, while a falling index would lead them to buy stocks or futures. This tends to dampen volatility.

With expiring options changing dealers' gamma profile, volatility can potentially rise.

People are more understanding of options' impact on the market and are just trying to "front-run it," Kris Sidial co-chief investment officer at volatility arbitrage firm Ambrus Group, said.

While increased volatility around options expiration is nothing new, growth in options trading volume and increased awareness of this dynamic has led to a more noticeable uptick in stock gyrations during options expiration weeks this year.

Of the 13 weeks this year that the S&P 500 logged a weekly loss, 7 have been options expiration weeks. All but the April expiration saw stocks head lower.

The SPX is now down around 0.4% for the week.

(Saqib Ahmed)



China's summer slowdown is having a sizeable impact on today's session in Europe with luxury goods makers well in the red and France's LVMH and Kering taking the most points off of the STOXX 600.

Mikael Jacoby, head of continental European sales trading at Oddo notes that Beijing's policy shift to close the wealth gap in the country had prompted fears among investors of "hunt the rich" policies would obviously hit European luxury giants.

Moreover, with China providing the bulk of the growth for these groups, the latest macro data and Covid-19 infections were a clear worry.

More cracks appeared indeed in China's growth story after today's batch of disappointing retail sales while supply bottlenecks and raw material shortage dent factory output and social restrictions weigh on service.

Meanwhile, debt-laden China Evergrande's liquidity crisis and the country's recent regulatory crackdown add to the unease.

What could brighten the picture, some economists believe, is some good old monetary stimulus.

"Today's weak data and the cumulative impact of policies mean the economy needs more liquidity to lessen the impact of rising credit premiums," analysts at ING said in a note.

They called for a 50 basis point cut to the reserve requirement ratio by the country's central bank in October as did Standard Chartered.

Both banks also said they would downgrade China's annual growth projections if the situation did not improve.

(Anushka Trivedi with Julien Ponthus)



The Nasdaq Composite relative to the Refinitiv/CoreCommodity CRB index appears to be at an important juncture on the charts:

The Nasdaq/CRB ratio, on a weekly basis, hit a record high of 80.54 in early November last year. Since then, however, the tech-laden Nasdaq has underperformed the index of materials and things. In fact, the ratio hit a 14-month low at 65.69 in early June.

Although it has since clawed its way back up some and is now at 67.88, the ratio has been flirting with what appears to be significant support in the form of a log-scale trend line from its 2011 trough, now around 67.85, as well as the 100-week moving average $(WMA.AU)$, now around 67.30.

The ratio did fiddle with the support line in late 2018. However, with the market's December bottom that year, it quickly reversed to the upside without breaking the 100-WMA. The trendline then contained weakness in 2019, and again in early 2020.

Of note, the ratio has been on a record run versus its 100-WMA. In fact, it is on pace for its 512th-straight weekly close above this long-term moving average. This current run above the 100-WMA absolutely dwarfs the ratio's 155-week streak that lasted into the Y2K "tech-bubble" top.

However, the ratio is now only 0.8% above the 100-WMA, which is the tightest disparity since it crossed back above it in early December 2011.

Thus, it may now be time for tech , and FANGs

for that matter, to once again step up in order to underpin a renewed Nasdaq advance relative to commodities.

A ratio weekly close below support can add credence to the view that a sea change in trend is underway. A deeper decline to threaten the March 2000 high at 28.9 could see the ratio lose more than half its value from current levels.

(Terence Gabriel)



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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)

Disclaimer: The views expressed in this article represent the personal views of the author and do not constitute investment advice from this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, nor does it assume responsibility for any losses arising from the use of or reliance on the information in the article.
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