Macroeconomic Data Takes Center Stage

Despite the announced merger of two media firms, macroeconomic reports stole the show last week, although earnings releases continued to roll in with weakness in the healthcare sector. The highly anticipated nonfarm payroll report noted that the U.S. economy added 209,000 jobs last month, besting estimates of a 183,000 gain, and registered a 4.3% unemployment rate. Overall, 2017's average monthly growth of 184,000 jobs is on par with 2016's average monthly gain of 187,000. However, we consider employment figures—especially the unemployment rate—to be at best coincident indicators because they provide little indication of the future travel of economic activity. Two indicators that we think provide a better economic prognostication are the Institute of Supply Management's Purchasing Managers Index and monthly heavy-truck sales, both of which were reported this month.

July's PMI reading of 56.3 was down 1.5 points from June's but consistent with the year-to-date average reading of 56.4. There is a strong positive relationship with yearly changes in the rolling three-month average West Texas Intermediate price and the PMI. This relationship stems from the massive increase in U.S. oil and gas production and the subsequent growing energy exposure among diversified industrials. We think looking at the combination provides a better lens through which to analyze future developments. Although July's WTI oil prices posted their strongest monthly increase since April 2016, the rate of increase has decelerated since May. Moreover, the current $50 per barrel price is consistent with levels seen in the back half of 2016, suggesting that manufacturing growth may slow somewhat over the coming quarters.

Another indicator we think has proved its mettle is heavy-truck sales, although it is commonly downshifted in importance because of the release of monthly auto sales. A notoriously volatile series, heavy-truck sales have been a decent leading indicator heading into recessions and a coincident to lagging on the way out. The July figure increased a modest 2.4% to a seasonally adjusted annualized rate of 379,000 units. This is approximately 10% above the historical average and down from the average annualized rate of 392,000 units experienced since the start of the year.

We see decent prospects for the manufacturing landscape, but the pace of growth may still be underwhelming. An interesting dynamic of late is the U.S. dollar's tumultuous turn down. This week, the U.S. dollar index hit a 15-month low against its rival currencies. The dollar weakness could stem the tide of foreign-currency headwinds and help propel reported results.

The latest in the content-is-king saga is the announcement that Discovery Communications Inc (rating: BBB/UR-) is acquiring Scripps Networks Interactive Inc (rating: BBB+/UR-) in a stock-and-cash transaction that values the owner of Food Network and HGTV at an enterprise value of $14.6 billion. Following the deal, we placed both firms under review negative. Elsewhere, earnings reports continued to trickle in last week with notable weakness in healthcare, including at Cardinal Health Inc (rating: A/UR-), Teva Pharmaceutical Industries LTD (rating: BBB-, stable), DaVita Inc (rating, BB+, negative), and Hologic Inc (ratings: BB+, positive).

In the corporate bond market, the average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) remains near the tightest levels of the year, although the index widened 1 basis point to end the week at +107. In the high-yield market, the BofA Merrill Lynch High Yield Master Index widened as well, closing the week at +363 basis points, +4 basis points wider than last week's ending level of +359. In the equity market, the S&P 500 was up slightly, the Dow Jones hit a record high, and volatility continued to sink to new lows.

Bond issuance was down meaningfully versus the previous week with the absence of AT&T Inc's (rating: BBB/UR-) $22.5 billion, seven-part transaction that was the third-largest deal in corporate bond history. We note that automakers General Motors Co (rating: BBB, stable) and Ford Motor Co (rating: BBB, stable) successfully issued $4.5 billion in multitranche paper despite monthly auto sales figures that all but confirm U.S. light-vehicle sales peaked last year.

Fund flows in the high-yield market increased by $1 billion this week, with nearly $750 million coming from high-yield exchange-traded funds and the remainder from open-end funds. This marks the fifth-highest inflow level this year, although it is approximately 45% of the peak weekly inflow so far in 2017, which occurred the week ended April 7.

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