Slowing Manufacturing Sectors Fuel Central Bank Stimulus Speculation

US Stocks and oil pared yesterday’s gains while both Treasury yields and swap rates fluctuated as markets digested a bevy of mixed global economic data.  There was a risk on tone overnight after both China’s official NBS manufacturing PMI and Caixin flash manufacturing PMI came in above expectations, prompting a short-lived rally in crude.  The Chinese manufacturing sector remains below the expansion-contraction line, but the internals of the report showed output, new orders, and supplier delivery times all improved from August.  Inventories was the only component to deteriorate at a faster pace.  Overall, the gauge is considerably weaker than levels seen earlier this year, but the sector appears to be bottoming out thanks to some help from the People’s Bank of China.  A separate report showed manufacturing in most Eurozone countries missed estimates, adding to pressure on the ECB to expand its stimulus program.

Data in the US remained mixed, further complicating the Fed’s rate decision.  The ISM’s index of national factory activity barely grew in September, falling to 50.2, the weakest since May 2013.  Only seven of the 18 industries within the index grew last month, the fewest since December 2012, indicating that a stronger dollar and slowing demand abroad is starting to impact the sector domestically.  A separate report showed jobless claims rose last week, but they remained near decade lows.  Claims have remained below the 300,000 threshold associated with an improving job market since early March.  Tomorrow’s payrolls report will have a greater influence on the Fed’s thinking, but it’s worth noting that the current ISM level is lower than where the Fed has typically hiked rates in past cycles.

Aside from the data, the market will watch the corporate issuance calendar and a variety of central bank speakers including Lockhart, Williams and the ECB’s Mario Draghi this evening.  It’s also worth mentioning the developing situation in Syria, where Russia and Iran continue to take on a larger role in the country’s ongoing civil war.