Markets rocked as ISM manufacturing drops to decade low

6:48 pm 1 October 2019

Summary:

  • ISM manufacturing PMI: 47.8 vs 50.4 exp. 49.12 prior

  • Stocks swoon, USD pulls back, Gold spikes

  • Improvement in UK data paints misleading picture

  • Aussie dips on RBA rate cut

 

The US economy has been perceived as resistant to global slowdown. The latest  ISM does not fit into that narrative though – a drop to 47.8 means a risk of manufacturing recession is alive. Defying a small uptick in Markit PMI the US ISM slid to 47.8 from 49.1 points and well short of expectations of 50.1 points. This number points at a significant contraction in industry, fuelled by declines in new orders and employment.

In terms of market reaction its been pretty clearly seen as bad news with the print itself the lowest in a decade. US stocks have taken a tumble with the S&P500 down by around 1% since the news hit while the US dollar has also fallen back after earlier trading higher against almost all its peers. As is often the case with US data perhaps the sharpest move was seen in precious metals with Gold spiking sharply higher and bouncing strongly from the recent lows. 

On the face of it the latest figures from the UK manufacturing sector suggest an improvement for the month of September, but if you dig a little deeper it is readily apparent that this is a somewhat misleading view and underlying activity remains subdued at best. The headline PMI rose to a 4-month high of 48.3, above both the consensus forecast (7.0) and the prior reading (47.4) but this is largely due to a rise in purchasing and input stocks as Brexit preparations start once more. Worryingly, several key indicators such as new orders, output and employment all fell further and any improvement in the headline reading can be explained away as a one-off Brexit related quirk rather than any real improvement in the sector .   

 The Reserve Bank of Australia decided to slash its main interest rate by 25 basis points to 0.75% today, matching the median Bloomberg estimate. In its communique the central bank reiterated that it was reasonable to expect an extended period of low rates, adding though, that a gentle turning point in the economy was reached. This phrase indicates the RBA could be reluctant to continue cutting rates from the current levels even as the central bank does not rule out subsequent rate reductions if needed. In terms of developments in the domestic economy, the RBA underlined the subdued pace of wage growth as well as a possible slight slowdown in employment. The bank stressed the economy still had some spare capacity which was constraining inflation.

In our view today’s decision puts some pressure on the Reserve Bank of New Zealand to consider further rate cuts. This seems to be especially true when we take into account the latest dismal confidence data among New Zealand’s companies we were offered on Monday. Having that in mind, we reckon that buying AUDNZD could become attractive once both Antipodean central banks diverge in their policy.

 

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