Manufacturing PMI Gets Even Uglier

It was another ugly data set from the ISM manufacturing read, but it may not mean we’re headed for a full-blown recession.

If last month’s data was ugly, then this is even uglier. Not only have the headline PMI, new orders and production contracted at their fastest pace since the great recession, employment is its lowest since 2007 and exports fell off a cliff. On the backdrop of global growth concerns, this only exacerbates these fears and resulted in the S&P500 shedding -1.2% and USD/JPY printing a potential top and basically slamming risk appetite. Whilst this has seen further calls for a recession, we’d want to see the service PMI read also tank before placing that bet.

ISM Manufacturing PMI data remains a firm favourite for predicting recessions, as it has done an excellent job since its inception since 1948 (albeit a few false signals). Yet times are changing. Data from the world bank suggests that as of 2017, the US Services sector accounted for over 77% of GDP. Therefor Services PMI could warrant a closer look in tandem with manufacturing PMI, to better access whether the US in fact is headed towards, or already, in a recession.

Upon first inspection, a clear divergence appears between the two; services PMI remains firmly expansive whilst manufacturing is contracting at its fastest rate since 2009. So, which one is correct?

Service PMI has remained expansive since the last recession in late 2009, whilst manufacturing PMI has provided two false signals in 2012 and 2016 (we’ll ignore the marginal, 1-month contractions around these key dates). On both occasions, service PMI remain defiantly expansive and the US did not head into recession.

However, when growth momentum for manufacturing declined between 2004 – 2008 and ultimately predicted a recession, service PMI weakened in tandem, essentially confirming the broad scale deterioration of the broader economy. Yet this doesn’t seem apparent this time around.

That said, the spread between manufacturing-service PMI is reaching levels which usually prompts mean reversion which leaves the following scenarios:

Service PMI drops to close the gap
Manufacturing bounces to close the gap, or
They meet somewhere in the middle.

Two out of those three likely end with both in expansive territory, so perhaps we’re not heading to the end of the world in recessionary terms yet.

Still, a weak manufacturing PMI is clearly bad for that sector. So should come as no major surprise to see the Dow Jones Transportation Index falling over -2.3%. The iShares Transportation ETF has been ranging between ~175 – 200 since April, but momentum is pointing lower and prices appear to be headed for the lows. Given the bad numbers from manufacturing PMI, we’d expect the index to head for and break beneath 175 over the coming week/s.

Since the prior analysis, FedEx has broken out of a small, bearish pennant and the June 2016 low. The mixture of the trade war and contracting manufacturing are likely to weigh on the stock without a solid turnaround in sentiment, so we remain bearish. Over the near-term we’d like too 147.82 hold as resistance, although we could also use 154.57 as a more conservative approach for risk management. For now, we’re waiting to see if the stock can, make its way down to the January 2016 low.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.