Domestic Manufacturing Data Helps Investors Look Past Gloomy OECD Report

US stocks are paring early losses while Treasuries rallied in the early morning and are now selling off after strong US factory data overshadowed mediocre manufacturing reports abroad and a fall in oil prices.  We walked in this morning to pressure on risk assets after overnight readings on manufacturing in China and the euro area showed mediocre expansion.  China’s official factory activity gauge showed only tepid growth, while the Caixin Manufacturing PMI slid deeper into contraction with its weakest reading since February.  During the European session, Germany, Spain, and Italy all reported manufacturing PMI below expectations.  Adding to negative market sentiment, the Organization for Economic Cooperation and Development (OECD) warned that the US could be falling into a self-fulfilling “low-growth trap” where loose monetary policy causes more harm than good.  They encouraged governments around the world to enact structural economic reforms (fiscal) rather than rely on central bank policy (monetary).  The OECD cut its growth forecast in 2016 for the US to 1.8%, down from 2.4% previously.  The OECD predicts slightly stronger performances in Europe and Japan than they had previously been projecting, and maintained a 3% growth forecast for the world economy in general.
 
The market’s risk-appetite improved after data showed US manufacturing activity expanded for a third straight month in May.  The 51.3 headline number came in stronger than expected, while the new orders component remained roughly flat at a robust 55.7.  The employment sub-index remained flat, slightly in contractionary territory, but prices paid posted another strong gain, up 4.5 points since April.  The gain largely reflects the recent rebound in commodity prices.  Following the strong manufacturing report, investors will shift focus to Friday’s payrolls report to further determine the likelihood of a June or July rate hike. 

All three major US stock indexes are currently trading within 0.1% of yesterday’s close, while Treasury yields and swap rates are up 1-2 bps in the belly and front end of the curve.  Both WTI and Brent crude are currently down close to 0.50%.