Manufacturing Falls Deeper in Contraction in the US
Skerdian Meta•Wednesday, November 1, 2023•3 min read
The US dollar is under pressure as a result of a weak ISM manufacturing survey. The bond market is the primary driver, with rates falling 7-10 basis points throughout the curve. US 10-year rates have retreated further below 5%. Today, the Treasury disclosed fresh bond auction sizes, and 10-year sizes were not as huge as anticipated.
Bond rates have fallen precipitously as a result of a FOMO rally. A disappointing ISM manufacturing survey and lower-than-expected ADP employment statistics round out the picture. The equities market is ecstatic about lower rates, with the S&P 500 up 0.7% and the Nasdaq up 0.9%. This adds to the demand for risk assets and drives commodity currencies higher.
ISM Manufacturing PMI for October 2023 Highlights
- September ISM manufacturing PMI 46.7 points vs 49.0 expected
- August ISM manufacturing PMI 49.0 points
- Prices paid 45.1 points vs 45.0 expected. Last month 43.8 points
- Employment 46.8 points vs 50.3 expected. Last month 51.2 points
- New orders 45.5 points vs 49.2 prior
- Inventories 45.8 points vs 45.8 prior
- Production 52.5 points vs 52.5 prior
This is a surprisingly soft report and is overshadowing stronger JOLTS. The US dollar is softer in the aftermath and bonds continue to be bid.
Comments in the report:
- In the evolving supply chain environment, customers are increasingly taking an active role in initiating new projects, looking for cost reduction opportunities and lead-time mitigation, with a growing emphasis on collaboration. Post-pandemic, customers have learned they need partners to navigate rough waters.” [Computer & Electronic Products]
- “We need to coordinate very closely with suppliers in order to yield a more cost-competitive offer. More back and forth is needed to reach a reasonable total price.” [Chemical Products]
- “Orders and production remain steady, and we are maintaining a healthy backlog. Continued inflation and wage adjustments continue to drive prices up, although we should get some relief from the markets stabilizing.” [Transportation Equipment]
- “Cost increases are now generally isolated to specific commodities rather than blanket increases due to ‘inflation.’ ” [Food, Beverage & Tobacco Products]
- “Markets remain soft. Our customers have about-right inventory levels, but they paid more due to pandemic cost increases. Everyone is holding off on increasing inventories, hoping they can buy at lower costs.” [Apparel, Leather & Allied Products]
- “Overall, things continue to be very steady: Sales and revenue are as expected, and the supply environment has stabilized greatly versus 2021-22. Some things to watch include the Panama Canal (drought), U.S.-China relations, and the impact the UAW (United Auto Workers) strike could have on suppliers of ours who support automotive production. But overall conditions feel stable.” [Miscellaneous Manufacturing]
- “Cement negotiations have changed, with cement mills no longer offering annual or guaranteed pricing. We now want to contract more as a commodity, leaning toward quarterly, with fluctuating prices yet to be determined.” [Nonmetallic Mineral Products]
- “A recession feels imminent. Money continues to be pushed into the bank markets, driving inflation rates really high. Most plants are buying less material or reducing consumption in the name of sustainability, as well as running at 80 percent of capacity. Prices of some products may increase for the upcoming winter weather.” [Petroleum & Coal Products]
- “Business conditions and market demand remain strong. We are projected to be at capacity in the next 12 months.” [Primary Metals]
- “New business development is coming onboard. However, many forecasts are set for the beginning of 2024. Hiring and retaining quality people is still a struggle.” [Textile Mills]
S&P Global Manufacturing PMI for October 2022
- Manufacturing PMI final for October 50.0 vs 50.0 prelim
- Flash estimate was 50.0
- Prior was 49.8
- A renewed rise in new orders supported the move away from declining sectoral health.
- Demand conditions were historically muted overall, with firms downwardly adjusting their output expectations for the year ahead
- Total new order growth was led by domestic demand, as new international sales fell further and at a slightly sharper pace than in September
- Input costs rose at the fastest pace since April
The ISM manufacturing report is due at the top of the hour.
Siân Jones, Principal Economist at S&P Global Market Intelligence, said:
“October PMI data signalled a stabilisation of US manufacturing conditions amid a renewed rise in new order inflows and firmer output growth. Demand conditions reportedly showed signs of improvement as customer interest revived, but this was once again largely focused on the domestic market as new export orders fell at a quicker rate.
“Of concern were reports of dwindling backlogs of work, previously used to help support production, as firms also revised down their expectations for future output to the lowest in 2023 so far. At the same time, manufacturers cut employment for the first time in over three years as workloads were reportedly insufficient to warrant additional hiring or the replacement of voluntary leavers.
“On the price front, manufacturers saw sharper increases in costs and output charges, as inflation regained some momentum in the sector. Higher oil and oil-derived input prices again spurred hikes, as rates of inflation accelerated for the third month running.”
Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst.
Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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