Head of Macroeconomic Research
Summary: The US ISM manufacturing big miss is a worrying signal for the economy, but the only data that really matters for Q3 GDP will be the upcoming non-manufacturing ISM on Thursday.
The latest manufacturing ISM for September is out. There is only one word coming to my mind to describe it: UGLY. The headline index did not rebound, as expected by the market, but it felt further into contraction, at 47.8, which is the lowest level since 2009. It is moving way below its long-term historical mean of 52.9. All the major sub-components are oriented south. New orders, production, imports, exports and employment are all contracting.
Given the figures released for August and September, US industrial recession is likely to materialize in coming months. It is the reflection of a very depressed global manufacturing outlook, but also of a sharp decrease of new exports orders due to the strength of the USD, and a big drop of Boeing’s deliveries.
That being said, it is obviously a worrying signal for the US economy, but it should not be overstated in its significance. It should be reminded to everyone that the ISM manufacturing is a coincident indicator and it does not track so well GDP growth.
The only data that really matters for Q3 GDP will be the non-manufacturing ISM on Thursday. As household consumption represents about 70% of the US economy, it is clearly a much better gauge to assess the real state of economic activity. It will also provide a first answer to one of the most important questions that clients and traders are asking: Is manufacturing weakness spilling over into services? If the answer is yes, then consider a 25bps rate cut is a done deal in December, and at least another rate cut is highly likely in Q1 2020. In this context, it would be extremely complicated for the Fed to keep talking about “insurance cut”.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
