2 Oct

US Manufacturing PMI Data Brings Oktoberfest for Bears

WRITTEN BY Mike Sonnenberg

Yesterday, the ISM (Institute for Supply Management) and IHS Markit released their US manufacturing PMI data for September. The IHS market data showed improvement in US manufacturing activity. However, the ISM manufacturing PMI pointed to contraction for a second consecutive month. At 47.8, the ISM PMI reading was also substantially lower than analysts’ expectations. Analysts were expecting the ISM PMI reading to indicate expansion in September.

Manufacturing PMIs can be used to forecast a recession. Readings below 50 suggest contraction and readings above 50 point to expansion. The Chicago PMI gauges manufacturing activity in the Chicago area. Just a day before the ISM US manufacturing PMI data was released, the Chicago PMI pointed to contraction.

US manufacturing gloom spreads to markets

US markets were quick to absorb the gloom from the weak US manufacturing data. The S&P 500 (SPY) opened higher and gained early yesterday. However, it was quick to move into the red after the ISM data release. The S&P 500 lost 1.23% yesterday, while the Nasdaq closed 1.13% lower. The industrial-heavy Dow Jones (DIA) was the weakest among the three, with a 1.28% intraday loss. Asian markets were also under pressure today. Japan’s Nikkei closed 0.5% down today, while Singapore’s Straits Times Index was down 1.2% today at 2:41 AM ET. China’s Shanghai Stock Exchange is closed for National Day.

Production and employment are contracting faster

The ISM US PMI data showed that US manufacturing employment and production contracted faster in September. Prices continued to fall, though more slowly. The US manufacturing employment contraction may also affect September’s non-farm payroll data, scheduled to be released on Friday. Analysts expect the US economy to have added 145,000 jobs in September, compared with 130,000 in August.

Trade war impacting the US manufacturing sector and economy

The PMI data and other economic indicators clearly show the trade war is hurting the US manufacturing sector and the global economy. Although Donald Trump expected tariffs to bring factories and jobs to the US from China, that’s clearly not happening. Companies are looking elsewhere. Apple (AAPL), which is at the forefront of the trade war, is looking to shift up to 30% of iPhone production outside China. As Apple has tried to produce its products in the US without much success, it may choose another location. Apple has already started shipping made-in-India iPhones in India. Google (GOOG)(GOOGL), which rivals Apple’s iOS with its Android operating system, is moving the production of its flagship Pixel smartphones to Vietnam.

Google suspended business with Huawei in May after Trump banned US companies from dealing with the Chinese tech giant. Huawei launched its latest flagship phone without Google’s Play Store installed.

While Apple and Google are running away from China, Tesla (TSLA) is building a factory there to cater to the local market. By setting up a factory in China to produce Model 3s, Tesla expects to reduce costs and partially escape the trade war.

More tariffs are coming

On October 15, tariffs on $250 billion in Chinese goods are scheduled to go up to 30% from the current 25%. And in December, US tariffs on electronics will come into effect, which could hamper Apple. China’s 25% tariffs on US cars are slated for December 15. Although Tesla will escape those tariffs on China-made Model 3s, it will still be subject to them on other Tesla models.

If the trade war isn’t resolved quickly, it could rattle the economy. The global economy is already under pressure from the trade war. Furthermore, the JPMorgan Global Manufacturing PMI continues to point to a contraction in September. Next week, US and Chinese delegations are expected to meet in Washington to discuss trade.

The Fed in focus

With US Manufacturing PMI data pointing to gloom, Trump was quick to blame the Fed. Yesterday, he tweeted, “Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected.”

The Fed has cut rates by 25 basis points at each of its last two meetings. Job numbers and other indicators could confirm the fears brought by ISM PMI data. As a result, the Fed could be forced to be more accommodative. It’s scheduled to meet again on October 29 and 30.

Feeling defensive?

A lot of hopes are pinned on the trade deal. We’re in for an interesting month. If the US-China trade deal doesn’t happen and economic indicators remain subdued, recession fears could hit the market hard. A trade deal or Fed rate cut would only provide short-term respite to already bloated equities. The impeachment drama could also weigh on markets, and third-quarter results are set to pour in soon. To learn more about preparing for a recession, read Recession Signs, Market Crash—Time for Inverse ETFs?

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