11/6/2014
By Jennifer Coombs

The ADP jobs report indicated a fair amount of growth in the services sector, which is reflected in ISM’s October reading of the non-manufacturing purchasing managers’ index (PMI). ISM’s reading shows that the service sector is slowing, though still strong, at a composite reading of 57.1 compared to the 58.6 reading in September. We note that any reading above 50.0 is indicative of expansion. A huge positive in the report was an impressive 1.1-point gain in the employment component to 59.6. It’s worth mentioning that this is the third strongest reading for the employment component in the 17-year history of the report. The composite reading only exceeded 60.0 once, back in August 2005. However, some component readings slowed for the month and led to the overall decline from September. New orders were down 1.9 points to 59.1, which, although this is a high level, is the least robust reading since April 2014. Business activity also declined by 2.9 points to 60.0, and all other readings were little changed from the previous month. The pricing component reflected lower oil prices, falling by 3.1 points to 52.1 – the lowest reading since June 2012. With employment up and prices moderating, this is a mix that would certainly be viewed as positive if it weren’t for the slowdown in new orders. Nevertheless, the slower sectors in the report are not severe in the bulk of industries surveyed (16 out of 18 were positive). The two remaining sectors looking for growth in the services space are construction and retail.

To a lesser extent, but significant nonetheless, there was a slight improvement in the Mortgage Bankers' Association (MBA) reading on mortgage applications. The recent drop in mortgage rates had recently boosted refinancing applications, but it looks like purchase applications are now starting to get a lift too. In the week ended October 31^st, the number of purchase applications increased by 3.0% over the previous week, but despite this pop, the year-over-year rate remains quite depressed at -13.0%. The volume of refinancing applications shot up almost immediately after mortgage rates dropped, but after getting a huge boost throughout much of the month of October, the level of applications fell back in the most recent week to -6.0%. Rates moved slightly higher during the week as well, to 4.17% for conforming loans ($417,000 or less) compared to 4.13% in the previous week. Below is a chart of the activity in the MBA weekly applications year-to-date; clearly this fall was the busiest time for home buying and refinancing so far.

Note: We are holding off on an afternoon Hotline idea.

Jennifer Coombs
Wall Street Strategies

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