Weak US Manufacturing Activity Weighs on Financial Markets

 

Swap rates and Treasury yields went for a wild ride yesterday. The impact of a weaker-than-expected auction of Japanese 10-year debt spilled into Treasury markets, initially pushing yields/rates 6-10 basis points higher across the curve before an abysmal US manufacturing print reversed all of the selloff and then some. The manufacturing index reported by the Institute for Supply Management fell to its lowest level in more than a decade during September, hinting that the wrath of the US-China trade war may finally beginning to makes itself felt in domestic factory activity. However President Trump was quick to point the finger at Fed Chair Jerome Powell, tweeting that our central bank “have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected.” Yields/swap rates finished yesterday’s trading session 1-6bps lower across the curve in a bull steepening pattern, with the yield on the benchmark 10-year Treasury near 1.63% — its lowest in three weeks.

 

 

It has been almost a year to the day since Jerome Powell made his hawkish remark that rattled financial markets — “We may go past neutral, but we’re a long way from neutral at this point, probably.” The latter part of the comment hinting at the need for additional hikes. Yesterday Chicago Fed President Charles Evans (voter) acknowledged the drastic change in sentiment throughout the course of 2019, stating “Within six months, I went from thinking it appropriate to eventually take policy rates 50 basis points above neutral to one where 50 basis points below neutral was in order”. Evans currently feels confident that the economy (measured by economic fundamentals) remains “solid”, while still noting the risks of trade relationships that “could be costly, but also may never occur.”

 

 

Hiring in the US continues to slow, as depicted by the ADP employment report this morning. Private payroll additions tallied 135k during September, falling 22k from August’s downwardly revised figure and missing expectations of +140k. The three-month low in hiring will place more importance on Friday’s more comprehensive report by the Labor Department, where median forecasts currently call for 130k increase in payrolls while unemployment holds steady at 3.7%.