The weakest ISM Manufacturing print in a decade turned Treasuries from red to green yesterday (and stocks from green to red) as concerns that a global manufacturing slowdown had finally reached U.S. shores took hold. The index slipped from 49.1 to 47.8 in September, the weakest since 2009. While manufacturing accounts for a little more than 10% of the U.S. economy the fear is that continued slippage will bleed into the services arena which constitutes nearly 90% of the economy, and has held up much better with readings still in the mid-50’s. On Thursday, the ISM Non-Manufacturing Index is due with a 55.1 print forecast and the September jobs report follows on Friday. The employment report is expected to show a bit of resilience with new jobs forecast at 147,000 versus the more middling 130,000 print in August. One thing to remember is the GM strike started after the survey week for the jobs report but was a factor in the ISM numbers yesterday. With more than 48,000 striking workers still idled the impact will show itself in the October jobs report if it continues into mid-month. This morning the ADP Employment Change Report came in close to expectations with 135,000 new private sector jobs versus140,000 forecast. The August number, however, was revised lower from 195,000 to 157,000. The concern here, as in other reports, is the slowing momentum. The 3-month ADP average is now 145,000 jobs compared to 201,000 this time last year. That’s not recessionary for sure, but it’s decidedly slower hiring activity.
As mentioned above the ISM Manufacturing Index for September disappointed and the misses were across the board. The headline index dipped from 49.1 to 47.8, missing the 50.0 forecast. That level was the worst since June 2009 when the economy was just starting to emerge from the Great Recession. The employment sub-index fell to 46.3 from 47.4 which is the lowest since January 2016, and prices paid remained in contraction at 49.7 from 46.0 in August. Digging deeper into the details, only three of 18 industries reported growth, and inventories fell from 49.9 to 46.9. New export orders continued to fall, this time hitting 41.0, a level not seen since 2009. Weakness abroad, the trade war and the strong dollar all continue to weigh on domestic goods producers.
While manufacturing makes up just over a tenth of gross domestic product, slowing in the sector combined with cooler business investment and economic growth puts the U.S expansion, the longest ever, in a more delicate position. The contracting manufacturing index here was matched by several other overseas economies namely Europe, Japan and China, who have experienced contraction well before the U.S. given their greater reliance on manufacturing.
And if there is a ground zero for the manufacturing implosion it is China. China’s factory sector contracted for a fifth month in September and Europe’s manufacturing sector slumped as German factories experienced their worst month since the depths of the financial crisis. The latest disappointing data adds to a growing amount of evidence of further dimming in the global economic outlook. Until August, the U.S. factory sector had managed to at least avoid sliding into contractionary territory but with back-to-back prints below 50, and heading lower, the headwinds from the global slowdown appear to be hitting our shores with more force.
The World Trade Organization cut its forecast for commerce to the lowest in a decade and the smell of deflation resurfaced as South Korea, a bellwether for international trade, reported a drop in consumer prices, and the Reserve Bank of Australia cut its interest rate to a record low and said it may ease further. The International Monetary Fund, already projecting a 3.2% growth pace this year that would be the slowest since the financial crisis, will release an updated estimate later this month as policy makers from across the world gather in Washington for the fund’s annual meeting.
The report also prompted a redirection of presidential tweets from impeachment-related targets back to the Fed for the first time since the whistleblower report became public knowledge. The president blamed the weak ISM reading on the strong dollar and lack of additional rate cutes. Meanwhile, most business comments in the ISM report cited weak overseas economies and the uncertain trade policies as primary reasons for the poor showing.
Finally, the report also had a big impact on expected rate-cutting odds. The odds of another 25bps cut at the October 30 FOMC meeting rose from 40% to 68% as the ISM weakness and presidential browbeating moved markets. A cut by year-end has risen to 88%. While the fourth quarter tends to be a seasonally bearish time for Treasuries, given the slowing manufacturing sector and slowing global economies we see the range of the 10-year for the final quarter to range between 1.40% to 1.90%. Presently, the 10-year yield is1.63% while it awaits the next catalyst that could be either political in nature or economic, or both.
ISM Manufacturing Index Sinks Deeper into Contraction
The ISM Manufacturing Index’s deeper slide into contractionary territory led to a steep selloff in stocks and ignited a Treasury rally as worries of the global manufacturing slowdown arriving on our shores took hold. As shown, the index dipped to the lowest level in a decade as weak global growth, trade war uncertainties and a strong dollar all contributed to the poor ISM reading. The good news is that manufacturing accounts for only 10% of the U.S. economy, but if the slowdown worsens it will certainly bleed into the larger and more vibrant services sector. And with business investment still struggling, any slowing in the services sector is likely to dent consumer spending which is the true pillar of U.S. economic strength right now.
Agency Indications — FNMA / FHLMC Callable Rates
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