Investors Sift Through Variety of Economic Reports Ahead of Tomorrow’s Speech from Yellen

Equities are generally rallying today with Treasuries and swaps down in yield as markets digested a mixed bag of economic reports around the globe.  Manufacturing data in China remained weak, but a better-than-expected reading of the Caixin/Markit manufacturing PMI fueled optimism that the factory slowdown in China may be turning a corner.  In Europe, Germany’s unemployment rate fell to a record low of 6.3% last month, and manufacturing PMIs in the region for the most part narrowly beat expectations.  While the general tone of the data in both China and Europe was decent, both the People’s Bank of China and European Central Bank are expected to move forward with unveiling additional stimulus in the near term.

Data released in the US this morning was generally below expectations, headlined by a surprise drop in ISM Manufacturing (see chart below).  The index fell to 48.6, the lowest level since June 2009.  A reading below 50 signals contraction, and this result serves as a reminder that the US economic still faces some headwinds.  Historically the Fed hasn’t tightened monetary policy with the ISM below 50 (since at least 1994), but today’s print isn’t expected to prevent a rate hike when the FOMC meets later this month.  It does, however, increase the importance placed on this Friday’s payrolls report, as a big miss relative to expectations there, could cause the FOMC to rethink the anticipated 1st rate hike in over 9 years.  Treasuries are currently rallying 3-6 bps with the biggest move in the belly of the curve.  The dollar is generally softer today against most major currencies, while commodity prices are mixed today with WTI Crude down slightly to $41.50 per barrel, NYMEX Gas up 4%, and Gold trading flat.

Besides the economic data, the markets will keep an eye on today’s scheduled Fed speakers which include Chicago’s Evans (dove, voter ’15) and Fed Governor Brainard (dove, voter ‘15) this evening.  Fed Chair Yellen headlines the busy week of Fed speakers starting Wednesday.  She will give her economic outlook tomorrow in a speech to the Economic Club of Washington, and will also testify before Congress’ Joint Economic Committee on Thursday.