Weak US Manufacturing PMI puts global growth in focus

Global growth fears resurface, sapping risk appetite:

Stocks markets fell, while safe-haven assets rallied, after the release of a spate of weak manufacturing PMI data overnight. The greatest concern was elicited by US ISM Manufacturing PMI data, which revealed the deepest contraction in American manufacturing activity since 2009. The sell-off in equities brought about by this news ought to manifest on the ASX 200 today, and will likely erase the gains achieved yesterday after the RBA cut the cash rate to a new record low of 0.75%. It was all eyes on the RBA and its decision yesterday, with the market now expecting more cuts to come from the central bank before year end.

US recession risk climbs

Fears of a US recession are back on the table today, after US ISM Manufacturing PMI data showed that manufacturing activity in America is at its weakest since the Global Financial Crisis. As one of, if not the best, forward looking indicator for future US economic growth, the poor PMI numbers reaffirm that the US economy is grinding towards a material slowdown. And though a lot of this is probably due to a fundamental roll-over in the US business cycle, the big concern for US manufacturers, according to the ISM Report, is clear: “Global trade remains the most significant issue”.

Traders increase bets for Fed cuts

In response to the poor US manufacturing numbers, market participants are ramping up their bets of even more aggressive monetary policy easing from the US Federal Reserve. Another rate cut from the Fed before the end of 2019 is being given an 85% chance; and at next month’s meeting is back up to a 62% implied probability. A deeper cutting cycle by the Fed is also being implied. The interest rate futures curve is implying that the Fed ought to cut rates four more times from here, in a cycle that will extend all the way into early 2021.

US yields, stocks and Dollar fall: Expectations for more Fed-cuts has seen a drop-in bond yields overnight, especially at the front end of the yield-curve. The 2 Year US Treasury yield fell 8 points during Wall Street trade, while the 10 Year note fell 3 points, steepening-out the yield curve slightly. The tumble in US yields prompted a sell-off in the USD, which only earlier that day, had hit a new multi-year high, according to the US Dollar Index. Despite the weaker Dollar and lower yields, the fear elicited by a bigger-than-expected slowdown in the US economy drove US equities lower, with the S&P 500 falling 1.2% last night.

RBA cuts rates to record low

In news of local concern yesterday, as would be well known, the RBA cut interest rates to a new record low of 0.75%. The move was widely expected going into the RBA meeting. In justifying its decision to cut rates, the RBA pointed to its expectation for softer jobs growth in the Australian economy, brought about by recent weakness in local economic activity. The RBA was careful not to sound too downcast, however, stating it does see the economy at a “gentle turning point”, which should see growth return closer to trend in the coming years, and full employment and target-inflation subsequently achieved.

RBA expected to cut further, pushes AUD down

For whatever assurances provided by the RBA about its belief that the local economic fundamentals remain strong, market participants walked-away from the meeting with the opinion the RBA will be cutting rates further from here. Although equivocating in the immediate aftermath of the meeting, traders have priced-in a 60% chance that the RBA cuts rates again before the end of 2019. That move prompted a tumble in Australian Government Bond yields, and the AUD, with local currency trading at a fresh 10 year low briefly overnight. The ASX 200 benefitted from the fall in the currency and bond yields, closing 0.8% higher yesterday.

The RBA joining global race to the bottom

A small point of contention is why traders became so bearish on the Aussie rates on the back of yesterday’s rate-cut. Afterall, the RBA’s prognosis for the economy was largely unchanged. The answer may have something to do with this statement: “The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy.” It suggests that rate cuts, and expected future rate cuts, from other central banks is forcing the RBA to tie its decision making to these global forces.