Manufacturing a Mess

Manufacturing a mess.  Stocks sank yesterday on trade fears and a not-so-surprising pullback in US manufacturing. China lodged a complaint about US tariffs to the WTO and bad economic numbers drove the selling in yesterday’s session.




  1.  Factory factor.  My regular readers are well aware of the slow, but steady decline in US manufacturing year to date.  The problems first began to show up in regional Fed reports.  Those reports typically take the pulse of local manufacturing activity.  The reports are not popular with traders so their decaying numbers have been largely overlooked.  If one paid attention to the numbers, it should not have come as a great surprise when yesterday’s ISM Manufacturing PMI came in at 49.1, down from last month’s read of 51.2.  Numbers below 50 represent a contraction, and the last time this PMI came in below 50 was in 2016 when sentiment on the industrial economy was at a low.  A Trump election win later that year caused an increase in manufacturing sentiment and activity as many expected the pro-business businessman to prioritize domestic manufacturing.  Then came the trade war, which all but brought manufacturing to a stand still.  Looking at the chart, the PMI tells the story quite clearly as the index rose to its height in 2018 only to rapidly decline and finally retreat below 50 in August.  According to the Institute For Supply Management (ISM), respondents cited trade issues as the most significant factor impacting their business.  What makes the contracting PMI even more concerning is the fact that manufacturing is contracting in other developed economies such as Germany, UK, Italy, and the Eurozone, which are all in the below-50 category, making the probability of a global recession more likely.  Still it is important to recognize that the US economy is driven more by services than manufacturing and the consumer, though weary, is still active.  Tomorrow we will get a similar read from the US Services economy from both Markit and ISM.


  1.  Painted into a corner.  With the latest bit of economic data showing signs of contraction, one would suspect that the Fed would be somewhat concerned about the future health of the US economy.  An aggressive new tariff which took effect over the weekend adding 15% on roughly $110 billion in consumer goods will add further concern.  Dare I highlight the word consumerin that last sentence?  The Administration’s aggressive trade tactics which have clearly affected US business have left the Fed in a very tight spot.  The President has put a lot of verbal pressure on the Fed to lower rates in order to backstop the slowing economy that has resulted from the trade war.  Though the Fed has independentlymade one rate cut, the President is adamant that more is required.  Whether or not the Fed will grant the President’s request, they will have very little choice in the wake of a clear slowdown in economic activity.  Another rate cut is not necessarily in the bag as there are still voting FOMC members who believe that the economy is healthy.  Specifically Boston Fed President Eric Rosengren, who dissented in last month’s meeting, just yesterday spoke of keeping rates steady.  In contrast, St. Louis Fed Chief James Bullard called for a -50 basis point cut in response to yesterday’s weak manufacturing PMI.  With a FOMC meeting just 14 days away, Fed Funds futures puts a 94.4% probability of a -25 basis point cut and 9.6% chance for a -50 basis point cut.  I have said it before, the President may get his rate cut, but at the expense of the economy.




Stocks tumbled yesterday after a new wave of tariffs took effect over the weekend causing China to file a complaint with the WTO.  Jitters were made worse when ISM released its manufacturing PMI, which came in lower than expected, indicating a contraction.  The S&P500 fell by -0.69%, the Dow Jones Industrial Average dropped by -1.08%, the Russell 2000 traded off by -1.51%, and the NASDAQ Composite Index slipped by -1.11%.  Bonds advanced and 10-year treasury yields fell by -4 basis points to 1.45%.  Crude oil fell by -2.11% ahead of next week’s OPEC meeting pulling down the energy sector and Gold climbed by +1.16% to $1,547.10 per ounce as traders sought safety assets.




– This afternoon we will get the Fed Beige Book which provides anecdotal information from around the country’s various Fed regions.

– Crude oil inventories are expected to have decreased by -3.1176 million barrels.

– Lots of Fed speakers today.  We will hear from Williams, Kaplan, Bowman, Kashkari, and Evans.  You can bet that traders will want to hear their thoughts on manufacturing and the trade war.

– American Eagle Outfitters and Michaels will report before the bell and post-market announcements will include Palo Alto Networks and Slack.

daily chartbook 2019-09-04

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