ISM Manufacturing PMI jolts markets back to reality
- ISM Manufacturing: The PMI remains below 50 (in contraction) but the price paid component has jumped above 50 (inflationary)
- Risk appetite sours: US yields have jumped again, driving a stronger USD and turning risk assets lower.
- USD is outperforming: After suffering early yesterday, the USD is once more outperforming major forex.
- Equities under pressure: Souring sentiment is weighing on European indices early today with US futures around -0.7% lower.
- Silver underperforming gold: In commodities we see metals and oil falling, with silver underperforming gold (an indication of negative risk sentiment)
The push and pull of inflation and recovering growth
Yesterday markets were served up a day which could be used to describe what is likely to be a choppy few weeks and months ahead.
First of all the Chinese PMIs reflected strong growth potential for the reopening of the Chinese economy. This drive a risk-positive reaction across markets.
But then, the US ISM Manufacturing PMI reversed this risk-positive bias. There was a minimal uptick in the PMI. But at 47.7 this was lower than forecast (which was 47.9) but more importantly this was still below 50.
This means that US Manufacturing is still in contraction. The ISM has been below 50 for four consecutive months.
This disappointment was compounded as the Prices Paid component of the ISM survey reflected a sharp increase.
This is a concern for those thinking that inflation was tracking lower.
The Prices Paid component has a positive correlation with the PPI (factory inflation) and subsequently into the prices that people pay for goods.
The increase in prices paid caused a stir in markets yesterday.
US yields continue higher, USD strengthens again.
The ISM data has driven a strong reaction on US bond yields.
Sharp moves higher for the 2-year yield (which is seen as a guide for interest rates) and the 10-year yield (seen as a gauge of future inflation and growth).
- The 2-year yield has increased above 4.90%. This is above the November high and is now the highest since July 2007.
- The 10-year yield is now back above 4% for the first time since November.
The USD is rebounding this morning.
We discussed in yesterday’s report about the Dollar Index dropping to test the support band 103.40/104.65.
This support band has held as the USD has rallied.
USD is stronger again, equity markets are falling away
The swing back in risk sentiment has left us with a stronger USD but also with higher risk assets such as equity markets falling again.
AUD/USD falling over again
We saw the Aussie initially strong yesterday in the wake of the Chinese data. However, any rally momentum in this move looks to be short-lived.
We continue to look for the corrective trend to play out.
- Moving average sare turning lower, with a “death cross” forming on the 21 dma and 55 dma.
- The daily RSI is correctively configured as it struggles under 50, suggesting rallies are a chance to sell.
This all still implies a correction towards the 0.6545/0.6630 support band.
The initial resistance is at 0.6780/0.6825.
S&P 500 futures still falling
US equity markets have turned corrective in the past couple of weeks. US futures are falling again today.
S&P 500 futures have broken the five-month recovery trend.
A test of the mid-January low at 3901 is threatening. A breach would open the bigger December support at 3788/3805.
There is mounting overhead resistance now between 4000/4040.
Support and resistance levels for Forex, Commodities, and Futures/Indices
|Brent Crude Oil
|S&P 500 futures
|FTSE 100 Index
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