The Day Ahead: Equities Dip Ahead of ISM Data

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A weak European session has September starting off in the wrong direction. Equities are falling ahead of the 10am ISM Manufacturing Index, which is predicted to fall into contraction for the first time since the economic recovery began.

Treasuries are benefitting from the uncertainty and are firming across the curve. The two-year yield is a basis point lower at 0.20%, while 10-year and 30-year yields are each three basis points down at 2.20% and 3.58%, respectively.

Equity futures are on track to break a four-session winning streak. The S&P 500 looks to open down 3 points lower at 1,214.70 and Dow futures are off 50 points at 11,553.

"Global financial markets are kicking September off on a somber note," said BMO Capital Markets. "Although most Asian equities had a decent rally overnight, Europe is having an off-day (or year), shedding anywhere between 0.6%-to-1.5%, on average."

Light crude oil is steady at $88.81 per barrel, while gold prices are 0.30% lower at $1,826.00.

Key Events Today:

8:30 - Initial Jobless Claims rose to 417,000 in the week ending August 20, causing the four-week average to jump 4k - its first increase in eight weeks - to 408k. This week economists are looking for 410k new claims. Predictions for this survey are usually little more than a recap of the four-week average, but this week's also take into account Verizon workers returning to work.

"Initial jobless claims probably fell by 7,000 after filings from roughly 21,100 striking Verizon workers boosted the tally over the two prior weeks," said Citigroup, noting all of the striking employees returned to work on August 23. "Hurricane Irene may have dampened claims in Puerto Rico, but the impact on the overall count is likely to be negligible given the relatively small number of claimants there."

8:30 - Revisions to the quarterly Productivity & Costs report will have to take into account slower growth in the latest GDP estimates, meaning that productivity figures will be cut. The first estimate assumed productivity fell by 0.3% and said unit labor costs rose 2.2%. Forecasters are now estimating a 0.5% cut in productivity and a 2.3% gain in labor costs.

"The recent drop in productivity is temporary, but productivity growth is likely to remain sluggish over the next two years," said IHS Global Insight. "Labor costs are edging up, but are not a problem yet."

10:00 - The ISM Manufacturing Index is anticipated to drop into contraction for the first time since the recession officially concluded. Last month the index dropped to 50.9 from 55.3, and since then regional surveys have only gotten worse - particularly the 34-point drop in the Philadelphia Fed index. The consensus call is 48.5.

IHS Global Insight predicts a 47 score, which they said would indicate "heightened recession risks" but would not be "a definitive recession signal."

But Janney Capital Markets predicts a 1-point increase to 51.9 this month. They argue that nervous perceptions drove the number down last month and that recent performance in the regional reports were just a hangover from late July.

"Curiously, nearly every subcategory within the ISM weakened significantly, except for the two most critical, the new orders and new export orders components," Janney said of last month's report.

"From our perspective, that result implies that purchasing managers are becoming increasingly concerned about future prospects, yet the more immediate evidence isn't yet bearing out the concerns," they added. "As a result, we're anticipating something of a bounce in the ISM manufacturing index for August, driven by less in the way of nervous perceptions."

10:00 - Construction Spending is anticipated to grow 0.2% in July, the same level as June. 

IHS Global Insights says to expect "another solid gain for private nonresidential construction, a small gain for single-family construction and another drop in public construction." 

Citigroup said to take in the new data cautiously, as revisions have been quite large recently. They look for modest gains in July. 

"Nonresidential structures appear to be trending higher, but those gains tend to be offset by declines in public projects," Citi said. "We figure residential construction increased on higher multifamily building and a rise in home improvements.