Morning Report: Manufacturing declines

Vital Statistics:

S&P futures3,88323.75
Oil (WTI)79.38-0.89
10 year government bond yield 3.75%
30 year fixed rate mortgage 6.51%

Stocks are higher as we start the new year. Bonds and MBS are up.

The week ahead will contain some important economic data, with the ISM data and the jobs report on Friday. Given that Jerome Powell’s focus has been the surprisingly strong jobs report, I could see a situation where bad news is good news – i.e. a weak report would trigger a rally in stocks and bond as it would increase the chances that the Fed will pivot from a tight monetary policy to a neutral one.

Jerome Powell discussed the three basic inputs to inflation. First, there are the supply chain issues, which manifested themselves early on in the pandemic. Second, there is housing which had its biggest impact beginning in 2022. Finally, there is services ex-housing, which basically means service sector wage growth. The supply chain issues have largely been fixed, and housing will probably fade by summer. The final component – services ex housing – is the focus of the Fed. Which means any negative news in the labor market will perversely be positive for the markets.

Manufacturing exhibited the fastest decline since May of 2020, according to the S&P Global Purchasing Managers Index. “The manufacturing sector posted a weak performance as 2022 was brought to a close, as output and new orders contracted at sharper rates. Demand for goods dwindled as domestic orders and export sales dropped. Muted demand conditions also led to downward adjustments of stock holdings, as excess inventories built earlier in the year were depleted in lieu of further spending on inputs. With the exception of the initial pandemic period, stocks of purchases fell at the steepest rate since 2009. Sinking demand for inputs and greater availability of materials at suppliers led to a further easing of inflationary pressures. In fact, the rate of input price inflation fell below the series trend. Selling price hikes also eased, albeit still rising steeply. Slower upticks in inflation signal the impact of Fed policy on prices, but growing uncertainty and tumbling dem

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