As previously mentioned the cracks have been appearing in the manufacturing sector, which is now within its fourth consecutive month of contraction (below 50). Whilst it has been considered a leaging indicator of economic health in US for decades, it requires other indicators to back up its leading quality, with a more recent one being the non-manufacturing equivelent (services), which I'll now refer to as NMI.
The NMI is still expanding above 50 but at a slower rates and as can be seen on the chart above, the manufacturing equivalent is now leading it, and the gap between the two is beginning to narrow and suggests a peak has been seen 7 months ago.
This does not bode well for the US economy as it now suggests both manufacturing and services are headed for a contraction, whose knock-on effect will drag GDP and markets with it.
The US Dollar suffered overnight as this now reduces the odds of a rate hike in March (which was already being treated with suspicion). USDCAD had the double whammy of weaker greenback and stronger oil, whilst CHF and JPY safe haven status also pushed the crosses down.
We have seen FED members raise concerns over the March meeting and question the timing of the unanimous December hike. In my books this is as good as saying rates will not be hiked in March and moving forward, I would be amazed if we see them raised this year.
Of the 10 components of the headline read only three of them are now within contraction, but a downturn has to start somewhere. NMI has been expending for 72 months and at some point, all good things come to an end. I believe we are approaching that time and I expect other components to dip below 50 over the coming months. Business activity, new orders and employment are all leading indicators in their own right and note that all three have declined since the December print. Once/if we see these contract it spells further trouble ahead for the US economy, and of course global growth concerns.
Skipping ahead several non-rate decision, QE4 is looking more likely than it was only a couple of months ago.
Cracks widen in US economy
Data from ISM shows that the contraction of the manufacturing sector is beginning to spill over to the wider economy, as the ISM non-manufacturing read suggests it may roll over.