Economics Journal: Manufacturing PMI vs. 2s
Weak economic data versus high and sticky rates is an important juxtaposition to monitor.
Discussion
ISM Committee Chair Tim Fiore painted a sobering outlook for the US manufacturing sector last week, flat out stating “there is no demand” and manufacturers have begun the process of right-sizing their workforce ahead of a 2H23 that is very unlikely to be better than 1H23, which on its own was not robust. He continues to harp on the theme that a “soft landing” is not nirvana, as unlike in a “hard landing” scenario there is very high uncertainty about where and when the ultimate bottom in activity hits. Interesting to ponder while thinking through the likely direction monetary policy.
Now, he did acknowledge that the manufacturing sector can have its own isolated recession without dragging the broader economy down, and that the US services sector remains strong at this time, but his KPI for tracking whether this is manufacturing-only or a broader downturn would be the ISM Manufacturing PMI falling below 45. So it’s close, but not quite there yet at least according to Fiore.
The manufacturing PMI data and Fiore’s attendant commentary are bearish for the economic outlook, but the 2-year UST note yield at around 490, just under its cycle peak, doesn’t confirm. Perhaps PMI data have reached their nadir and are about to turn up, or maybe headline inflation itself is about to firm up and turn higher. I don’t know. But it’s a really important juxtaposition - weak data vs. high and sticky rates - to keep top of mind.
How the Fed reacts to a firming in economic data is key, and as discussed in the Julian Brigden Fed Watch piece last night, the Powell Fed appears to have its finger firmly on the rate hike trigger.