US purchasing managers’ indices (PMIs) have been sliding since August 2018, albeit from elevated levels. After reaching a cyclical peak in September 2017, manufacturing PMI readings went sideways for a year before they started a downtrend. The latest reading has continued in this fashion, taking it to troubling levels.
US manufacturing activity has slowed for a sixth consecutive month, taking it further into contractionary territory. According to the latest Institute of Supply Management (ISM) survey, its Purchasing Managers Index recorded a reading of 47.8, down from August’s reading of 49.1 and less than the market’s expected figure of 50.5. The average reading since 1948 is 52.9 and any reading below 50 implies a contraction.
The ISM’s Tim Fiore said “trade remains the most significant issue”, pointing to a contraction in new export orders which began in July.
US financial markets responded by sending Treasury yields lower, especially at the short end where the US Fed’s policies have more effect. By the end of the day, 2-year bond yields had fallen by 7bps to 1.54%, 10-year yields were 3bps lower at 1.64% and 30-year yields had lost 2bps to 2.09%.
In terms of likely US monetary policy, according to federal funds futures contracts the implied probability of a 25bps cut or greater at the FOMC’s October meeting increased from 62% to 77%.