The Market Today

Manufacturing Activity Turns Negative Adding to Recession Worries

by Craig Dismuke, Dudley Carter


Fox Business: Vining Sparks on Uncertainties and Fed: Vining Sparks appeared on Fox Business this morning discussing the need for monetary policymakers to be aggressive in response to growing uncertainties.  Yesterday’s ISM report on manufacturing activity was yet another sign of the deleterious impact of trade on real economic activity (more below).  To view the video, click here.

Trade Deficit Declines in July: Goods imports fell 0.1% in July while exports rose 0.6% in July, pushing the monthly goods trade deficit down from $55.5 to $54.0 billion.  Total U.S. trade volume has stagnated over the past year but the deficit has shrunk in 2019 helping boost the GDP tally.

Mortgage Rates Within Striking Distance of 2012 Lows, Mortgage Purchase Applications Rise: Mortgage applications for the week ending August 30 fell 3.1% despite another decline in mortgage rates during the reference week.  According to the MBA report, the average 30-year mortgage rate dropped from 3.94% to 3.87%, the lowest since before the Fed began raising rates and down 1.30% from November’s peak. The cycle-low for 30-year mortgage rates, according to the MBA data, was just below 3.50% back in late-2012.  On a positive note, purchase apps in the current report rose 3.6% and are now approaching their highest levels since 2013 (see Chart of the Day).  Refi apps fell 7.0%.

Feds Officials Likely to Guide Markets in Final Comments Before Quiet Period: Investors will be closely watching comments from six Fed officials today, including four voters: Williams (V), Kaplan (NV) Bowman (V), Bullard (V), Kashkari (NV), and Evans (V).  In addition, the Fed will release it’s Beige Book report on economic conditions around the country this afternoon at 1:00 p.m. CT.  The Fedspeak and tone of the Beige Book will be some of the last insight investors receive before entering the pre-meeting quiet period.


September Starts Sluggishly As Investors Remained Worried About The Outlook: Although both ended off their lows, stocks and Treasury yields tumbled Tuesday after the ISM’s manufacturing index dropped into contraction unexpectedly in August and to its lowest level since 2016. Markets were already a bit anxious at the outset in response to the new U.S.-China tariffs that took effect Sunday, and worries that the U.K. government would attempt to thwart any effort to stop a no-deal Brexit. Equity futures had weakened overnight while the Treasury yields came into the U.S. session down from Asian-session highs, both tracking European markets lower.

Investors Sought Safety After Contractionary ISM: However, the sharpest action occurred immediately after the ISM’s August survey reflected an unexpected contraction of U.S. manufacturing activity in August (more below). The S&P 500’s 0.5% dip more than doubled to a 1.2% decline and the 10-year yield slumped from up 1.2 bps on the day to down 6.8 bps. A partial recovery during the afternoon left the S&P 500 down 0.7% and the 10-year yield 3.9 bps lower at 1.457%, a new low back to July 2016.

Short Yields Fell More After Bullard Suggested Fed Should Be Aggressive: The 2-year yield declined even more and posted a late pullback after Fed President Bullard said the Fed should cut rates by 50 bps in September (more below). The 5.2-bp drop put the 2-year yield at 1.452%, a new low since September 2017. The 5-year yield also declined more than 5 bps and settled at 1.330%, its lowest close since November 2016. Just after the Treasury market closed, another Fed official showed Fed officials remain divided on what to do next (more below).


Sentiments Turns Up As Hong Kong Tensions Ease: Global equities strengthened overnight and yields on core sovereign bonds rose in response to positive economic data and geopolitical developments in both Asia and Europe. Hong Kong’s Hang Seng index led all gains Wednesday, rallying nearly 3.9% after the country’s Chief Executive formally withdrew the infamous extradition bill that initially sparked the political protests that have plagued the country for months. Just hours before the announcement, Hong Kong’s PMI posted a second monthly drop and reflected the steepest pace of contraction in more than a decade.

U.K. Political Developments Add To Overnight Positivity: Politics were also the focus in Europe, where 21 members of parliament were kicked out of PM Johnson’s conservative party for joining the opposition in an effort to stop a no-deal Brexit. Parliament voted in favor of seizing the agenda from Johnson’s government in order to attempt and reach consensus on a bill to block a no-deal Brexit on October 31. The pound strengthened and the gilt curve steepened higher, with the 10-year yield pushing up 9.8 bps.

China’s Services Sector Surprises To The Upside: Away from politics, global services PMI mostly surprised to the upside. The Caixin China services PMI rose more than expected to a three-month high and July, despite deteriorating trade tensions and continued weakness in most manufacturing indicators. Most European service PMIs also topped expectations, leading the Eurozone-wide reading to a positive 0.1-point revision higher.

U.S. Assets Join Risk-On Tone Ahead Of Fed Comments: Following gains in Asia, Europe’s Stoxx 600 and U.S. futures were both up 0.9% around 7:30 a.m. CT. The Treasury curve was steepening as the 2-year yield had pushed 1.6 bps higher while the 10-year yield had risen 3.9 bps.


ISM’s Manufacturing Index Contracted in August: The ISM’s manufacturing survey posted a surprise 2.1-point drop that pushed the headline PMI down to a contractionary 49.1, its weakest level since January 2016. The disappointment was widespread throughout the details, as nine of the 10 underlying indices posted a sub-50 reading, a sign of slowing economic activity. Importantly, the new orders index matched its lowest level of the cycle, employment contracted for the first time in almost three years, and production hit a 45-month low. Reflecting the direct effects of the trade war and global slowdown, the index tracking export activity declined the most among the subindexes to its weakest level since 2009. Fears that the intensifying trade-driven deterioration in global manufacturing could be leaking into the U.S. economy more broadly have increased investors’ certainty the Fed will cut rates again in September.

Bullard Wants Aggressive Action Now: St. Louis Fed President Bullard, a current year voter, said the current Fed Funds rate is “too high” and the recent “global shock” of an escalating trade war is enough to justify an “aggressive” half-percentage point cut when the Fed meets later this month. With Fed Funds now trading above the entire Treasury curve, Bullard said “We should have a robust debate about moving 50 basis points at this meeting…It’d be better in my mind to go ahead and get realigned right now.” However, less than 20 minutes later, his colleague from the Boston Fed signaled he disagrees.

Rosengren Wants To Wait: Fed President Rosengren, who will also vote in two weeks’ time, said “one should not be overconfident that the economy will be just fine or that an economic downturn is inevitable.” He noted that, “It is clearly reasonable to make the assessment that risks are elevated. Should those risks become a reality, the appropriate monetary policy would be to ease aggressively. However, to date, these elevated risks have not become reality, at least for the U.S. economy.”

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