Morning Report: Manufacturing activity improves

Posted on December 3, 2024 by Brent Nyitray

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat.

Manufacturing activity contracted for the 8th consecutive month, according to the ISM Report. That said, conditions improved compared to last month. The internals of the report are mainly good news: new orders and production increased, while the prices index fell markedly to near-neutral levels.

 “U.S. manufacturing activity contracted again in November, but at a slower rate compared to last month. Demand continues to be weak but may be moderating, output declined again, and inputs stayed accommodative. Positive signs for demand include the (1) New Orders Index returning to expansion territory, (2) New Export Orders Index increasing moderately (up 3.2 percentage points but still in contraction territory), (3) Backlog of Orders Index dipping further into strong contraction territory, and (4) Customers’ Inventories Index indicating levels were only marginally above ‘too low.’ Output continued in contraction: Employment shrunk, but at a much slower rate, and production took a small step in the right direction. Demand remains weak, as companies prepare plans for 2025 with the benefit of the election cycle ending. Production execution eased in November, consistent with demand sluggishness and weak backlogs. Suppliers continue to have capacity, with lead times improving but some product shortages reappearing.”

The issue of potential tariffs barely came up; and its impact will probably be positive in the short term, as companies accelerate spending plans to beat the increases. So, all the sturm and drang in the media over the issue seems to be partisan posturing.

Fed Governor Waller supports a rate cut at the upcoming December FOMC meeting. “At present, I lean towards supporting a cut in the policy rate at our December meeting … Overall, I feel like an MMA fighter who keeps getting inflation in a chokehold, waiting for it to tap out, yet it keeps slipping out of my grasp at the last minute.” Waller emphasized that monetary policy is still restrictive, and cutting rates in December means that the Fed will still have its foot on the brakes, just not as hard.

The odds of a December rate cut have increased from 60% to 72%.

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