The United States ISM index fell five points from 56.5 to 51.3, sparking carnage on global markets overnight. And it was messy – especially on Wall Street. The thing is, respondents frequently cited poor weather for the drop-off in activity, which was significant – the biggest fall since 2011. New orders fell 13 percentage points and production was down almost 7 per cent. The employment index was also weaker and about the only area showing a lift was the prices component, which shot up 7 per cent to 60.5. The impact of poor weather on the result almost certainly suggests a rebound in the ISM in coming months, but in the meantime investors are spooked – especially given the lacklustre payrolls report we saw.
Global stocks were smashed and with about an hour left to trade, the S&P500 was off 2.3 per cent (1742) which gives a 5.3 per cent fall so far this year, bringing the index back to where it was mid-October 2013. The Dow is then off 300 points (15,398) and the Nasdaq down 2.7 per cent (3995). In Europe we saw similar losses, not quite as bad, with the Dax down 1.3 per cent, the CaC fell 1.3 per cent and the FTSE100 was 0.7 per cent lower.
Rates are still seeing safe haven flows and US Treasury notes are rallying in response. Last night the US 10-year yield fell a further 6 bps or so to 2.59 per cent – down over 40 bps so far this year. The 5-year is also 6 bps lower to 1.43 per cent and the 2-year is at 0.31 per cent. Aussie debt futures were up two to 3.5 ticks respectively on the threes (97.15) and tens at (96.100).
Commodities were mixed. Crude fell, with Brent off 0.2 per cent ($106.03) and WTI down almost 1 per cent to $96.5. In the metals space, gold was up $16.5 ($1256), silver jumped 1.1 per cent, while copper fell 0.6 per cent.
Forex moves were quite interesting. The Australian dollar initially spiked, the bid developing in the European session. At the high, the unit was at 0.8826 which was just after the US open. Shortly after that, the offer came on and the unit dropped 66 pips to be little change 0.8764. The euro pushed higher through the session and ended 40 pips higher at 1.3252, although the big mover overnight was the British pound. It fell 130 pips to 1.6298, notionally after the UK manufacturing PMI fell, although the fall was modest and the index is still showing a solid acceleration – 56.7 in January from 57.2. Finally, the Japanese yen slipped from 102.3 to 101.039.
Elsewhere It was pretty quiet. The only other data out showed US manufacturing holding steady in January – Markit’s PMI at 53.7 from 53.7. US Construction spending was up 0.1 per cent in January after a 0.8 per cent gain the month prior, and then the US Federal Reserve’s senior loan officers survey showed lending standards easing and loan demand rising – with particular strength in commercial and industrial loans. That’s it.
In markets today, the SPI suggests our market will be off 1.8 per cent. Data-wise the key event is the Reserve Bank’s cash rate decision at 1430 AEDT. The unanimous expectation is that the board will hold rates steady, and many economists are expecting the bank to move to a neutral bias. On the economics of it, I think that’s right – the bank should at least be neutral if not signalling a rate hike (of course they won’t signal a rate hike any time soon). The exchange rate target complicates the picture though – it overlays monetary policy with an enormous amount of political risk and there is a high probability the bank will underplay recent domestic indicators and delay any move to neutral. Instead, perhaps it will accentuate risks posed by the emerging market ‘crisis’ or last night’s ISM.
Other than that there isn’t a lot. We see a construction PMI out of the UK, then the PPI from Europe. In the US we see factory orders plus speeches from the Fed’s Jeffrey Lacker and Charles Evans (non-voters).
Have a great day…
Adam Carr is a leading market economist.
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