Morning Report: The manufacturing economy continues to slow down

Vital Statistics:

 LastChange
S&P futures3,92138.25
Oil (WTI)89.122.44
10 year government bond yield 3.96%
30 year fixed rate mortgage 7.06%

Stocks are higher as we begin the Fed meeting. Bonds and MBS are up.

The Fed meeting begins today, and the focus will be on the pace of future rate hikes. The market is hoping that this meeting will be the last in the string of 75 basis point hikes. Generally speaking an increase of 50 basis points is considered to be an assertive move against inflation, while 75 basis points is pretty dramatic. We won’t get projections or a dot plot this meeting, so it all comes down to parsing the language in the press release and hanging on every word Jerome Powell says at the press conference.

The manufacturing economy barely expanded in September, according to the ISM Survey. The 50.2 reading is the lowest since May of 2020. Leading indicators such as new orders, are contracting.

“The U.S. manufacturing sector continues to expand, but at the lowest rate since the coronavirus pandemic recovery began. With panelists reporting softening new order rates over the previous five months, the October index reading reflects companies’ preparing for potential future lower demand. In the meantime, demand eased, with the (1) New Orders Index remaining in contraction territory, (2) New Export Orders Index below 50 percent for a third consecutive month and at a faster rate of contraction, (3) Customers’ Inventories Index remaining at a low level, with the same reading as in September and (4) Backlog of Orders Index slipping into contraction. Output/Consumption (measured by the Production and Employment indexes) improved month over month, with a combined positive 3-percentage point impact on the Manufacturing PMI® calculation. The Employment Index shifted from contraction to a reading of 50 percent (unchanged), and the Production Index increased by 1.7 percentage points, staying in modest growth territory. Business Survey Committee panelists’ companies are continuing to manage head counts through hiring freezes and attrition to lower levels, with medium- and long-term demand still uncertain. Inputs — defined as supplier deliveries, inventories, prices and imports — mostly accommodated growth. The Supplier Deliveries Index indicated faster deliveries and the Inventories Index dropped 3 percentage points as panelists’ companies continued to manage the total supply chain inventory. The Prices Index decreased for a seventh straight month and fell into contraction territory, which should encourage buyers.

It is clear the Fed’s tightening regime is gaining traction, and the report of the Prices index falling into contraction is a leading indicator that inflation is being brought under control. The decrease in prices is being driven primarily by lower energy and metals prices.

Notwithstanding the ISM report, there were 10.7 million job openings at the end of September, according to the JOLTs jobs report. This partially offset a pretty big decline in August. Hires decreased to 6.1 million and the quits rate remained stuck at 2.7%

Construction spending rose 0.2% in September, which was up 10.9% year-over-year. Residential construction was flat.

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