TRADE AND THE ISM WEIGHED ON THE MARKETS

Trade and the ISM manufacturing Index weighed heavily on equities.  There is little I can add about trade…it is fluid, a fluidity based upon a five word tweet.

Regarding the ISM, the ISM dropped below 50 for the first time since 2016, the level between an expanding and contracting manufacturing sector.  The 49.1 reading was a shock, the result of economic uncertainty surrounding the trade war.  The majority of the decline was focused in new export orders which plunged to 43.3 from 48.1 prior, the lowest since April 2009.

Tariffs should be boosting input prices but the strong dollar appears to be blunting much—if not all—of the pass through.  Prices paid remained in contractionary territory (46.0 vs.45.1).

Generally speaking the ISM would have to sink into the low 40s and high 30s to be consistent with a broader downturn.   Economists are still projecting a 1.8% and 1.7% growth for the third and fourth quarter, respectively. In turn this will bring full-year growth down 2.2%.

To write the obvious, the media and the bond market were loudly pontificating about the “sure fire” recessionary data.  As written many times, 90% of trading is now algorithmic, trading based off of five word headlines utilizing momentum as the only parameter.

August was an extremely unique month.  According to the financial website FISUM, there were seven days which all markets moved in the same direction.  This is a black swan event blacker than negative interest rates, an event in itself is not even discussed in economic textbooks.  It is a statistical abnormality that should not occur but happened about 25% of August’s trading days.

Wow!  I will argue this is the result of technology trading that has entirely destroyed market mechanics.  The SEC, the Federal Reserve and several other regulatory entities have used words such as unbalanced or skewed to describe today’s environment.  Unfortunately if history serves as a guide, reform will only occur following a systemic crisis.

I will continue to argue a possible catalyst for such a crisis could be greater than expected growth that increases inflationary pressures that obliterates current monetary policy outlook.

Some will write this is wishful thinking given August’s ISM.  I beg to differ given the strength in jobs and housing prices in the secondary and tertiary markets.

Speaking of jobs, today the Fed releases the Beige Book or the statistical compilation utilized at the upcoming Fed meeting.  Moreover Friday is the release of the August employment report.  How will the statistics be interpreted?

Last night the foreign markets were up.  London was up 0.36% Paris up 1.05% and Frankfurt up 1.0%.  China was up 0.93%, Japan up 0.12% and Hang Sang up 3.90%.

The Dow should open moderately higher on reduced geopolitical tension from Italy to Britain to Hong Kong.  The 10-year is off 11/32 to yield 1.50%.

 

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