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The Dow’s Red-Hot Rally Faces a Critical Test Today

Last Updated September 23, 2020 1:15 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:15 PM
  • The Dow, S&P 500, and Nasdaq all rose on Tuesday, putting them on track to close at fresh all-time highs.
  • The US Stock market is basking in risk-on sentiment derived from reports that Trump will begin unraveling tariffs on Chinese imports.
  • Recession hawks are circling ahead of one pivotal data release that measures the health of a broad swath of the economy.

The Dow sauntered even further into record territory on Tuesday, reacting positively to a report that the US may roll back a series of tariffs on Chinese goods as part of a limited trade agreement.

However, Tuesday’s rally faces one major threat: a crucial data release that could signal whether the US economy has embarked on a course toward an imminent recession.

Dow, S&P 500, and Nasdaq All Ratchet Higher

Investor optimism launched Wall Street’s major indices toward solid gains. The Dow Jones Industrial Average popped as high as 27,524.96, and it currently stands at 27,492.11 for a gain of 30 points or 0.11%.

dow jones industrial average chart
The Dow popped toward an all-time high for a second straight day. | Source: Yahoo Finance 

The S&P 500 climbed 1.34 points or 0.04% to 3,079.61, while the Nasdaq ticked 8.06 points or 0.1% higher to 8,441.26.

After holding firm on Monday, the gold price slid by 1.23% this morning. At last check, the yellow metal was trading at $1,492.50 – below the psychologically important $1,500 level.

Vital Economic Data Release Drops on Tuesday

Tuesday’s Dow Jones rally faces a substantial test at 11 am ET, which is when ISM publishes its October Non-Manufacturing PMI report. This data release gauges the health of the US services sector, which accounts for around four-fifths of the overall US economy.

This ISM survey measures business conditions and sentiment. It also serves as a leading indicator of consumer data, which tend to lag business data in reacting to shifting market environments.

While still in expansionary territory, Non-Manufacturing PMI missed economist estimates by a wide margin last month, printing a 52.6 versus an expectation of 55.1. Readings below 50 indicate contraction.

non-manufacturing PMI, impact on Dow Jones and stock market
Services sector PMI unexpectedly plunged in September. Will October data bring improvement – or augur more pain in the future? | Source: Trading Economics 

September’s reading not only missed economist estimates, but it was also the worst since 2016 – and well below the rolling 12-month average of 56.8. That poor reading triggered a victory lap from recession hawks, who believe that longstanding weakness in manufacturing has already begun to pervade the broader economy.

Last week, ISM Manufacturing PMI printed a 48.3, languishing in contraction territory for a third straight month, prompting ING Chief International Economist James Knightley to state that the Federal Reserve must do more to support the market.

“With inflation and inflation expectations remaining subdued, the Fed has scope to offer more support to the economy,” Knightley wrote.

However, that support does not appear imminent. At present, Fed-funds futures imply just a 5.2% probability that the Fed will reduce interest rates at its next policy meeting in mid-December.

Trade War Rumors Embolden Dow Jones Bulls

A poor Non-Manufacturing PMI reading threatens to reverse the stock market’s current bounce, which stems from positive news on the trade war front.

According to the Financial Times, China has requested that the United States eliminate a portion of the tariffs  on Chinese imports implemented since the trade war began last year. Trade war doves might be pleased to hear that the Trump administration is considering the request and may roll back tariffs on $112 billion worth of China-produced consumer goods, which have been subject to a 15% levy since Sept. 1.

However – and this is where the optimism begins to peter out – the White House wants a trio of concessions in return, including firm commitments on agricultural purchase increases and a signing ceremony in the United States. Most significantly, the Trump administration desires tangible protections for US intellectual property.

If everything goes off without a hitch, the phase one deal – which officials have said could be signed as early as November – might cover more ground than it appeared to when negotiators first sketched an outline in Washington last month.

That’s particularly notable since Beijing is rumored to maintain few illusions about ever watching Xi and Trump sign the comprehensive trade deal  the latter has been promising since his first presidential campaign.

The risk is that, by introducing new topics into the discussions, the partial trade agreement will encounter new delays. In a worst-case scenario, negotiations could stall altogether, just like they have on multiple occasions this year.

The good news, at least for the US stock market, is that China appears to be maintaining a laser focus on US trade relations, so much so that other trade partners have been receiving the cold shoulder.

Speaking earlier today, Joerg Wuttke, president of the European Union Chamber of Commerce in China, said that Europe has begun to grow concerned that US-China trade talks have completely superseded relations between Beijing and Brussels .

“My observation is that there’s such intensity between China and the US that Europe fell off the cliff and is not seen on the radar of Beijing any more,” Wuttke said, according to the South China Morning Post.

Click here for a live Dow Jones Industrial Average chart.