Manufacturing Rebounds Strongly in September, Further Signifies Expanding Economy

The first week of the fourth quarter has started off with a heavy economic calendar, beginning with the release of the ISM Manufacturing Index today.  The September 51.5 reading came in significantly higher than the expected 50.4 and eased concerns surrounding the previous month’s sub-50 level.  New orders provided the largest uptick in the index, rising 6 points to 55.1, while production and export orders were steady at levels of 52.0 and 52.8, respectively.  Somewhat countering this upbeat economic data, U.S. construction spending fell for the second consecutive month in August and hit its lowest mark in eight months.  The 0.7% decline was driven by weakness across the board, both in the public and private sectors, and was well below forecasts of a +0.3% MoM increase.  Overall, markets viewed the manufacturing data as further evidence of a strengthening economy and odds for a Fed rate hike in December 2016 increased to over 60%.  Due in part to this increased Fed action probability, both stock and bond prices fell on the day, pushing the yield on the 10-year Treasury note up to 1.62%.           

Abroad, the U.K. saw its currency fall to a 31-year low against the dollar and 3-year low against the euro.  Markets were responding to British Prime Minister Theresa May, who on Sunday, announced her plan to invoke Article 50 in the early months of 2017, which would officially trigger the start of Britain’s departure from the European Union.  Brexit negotiations are expected to be a drawn out process, lasting an estimated two years.  British equities rallied following the currency devaluation with the prospects of increased exports on the horizon.  Asian markets closed mostly higher on the day, with the potential Deutsche Bank settlement easing contagion worries that had escalated on Friday.   

All three major U.S. stock indexes are currently trading down 0.25% for the day while Treasury yields/swap rates are up 1-4 bps across the curve.  Prices of crude oil continue to rise following last week’s report OPEC agreement, with Brent crude up 1.25% and WTI crude up 0.90% for the session, both 3-month highs.