Spring awakening in manufacturing sector?

Overall, the plethora of recently published economic data support our view that, following the very subdued performance in the final quarter of 2015, the US economy is getting back into stride. A focus of concern in recent months was the manufacturing sector, battered by the strength of the dollar and the appreciable slowdown in capital spending in the energy sector. But sustained output losses have so far not materialized. Now there are indeed signs that the sector is over the worst. The national purchasing managers’ index compiled by the Institute for Supply Management (ISM) is likely to bounce back discernibly. In such an environment, government bonds are likely to come under selling pressure.

The regional March survey results in the manufacturing sector published last week by the Federal Reserve Banks of New York and Philadelphia reveal a clear turnaround in the assessment of overall business conditions. For the first time since the late summer of last year, the percentage of firms reporting an improvement in business activity exceeded the percentage reporting a deterioration. The detailed returns on new orders, shipments etc. also improved sharply in some cases. Lumping these specific assessments into an overall index much as the Institute for Supply Management (ISM) does when calculating the (national) purchasing managers’ index, we arrive at ISM-equivalent index levels of a good 51 in each case. In recent months these had stood in a range of 45-48 on average. Given the similarity in the underlying trend of the survey results, it therefore seems likely that the national ISM index, which has been mired just below the 50-mark since October 2015, will climb back above the expansion threshold.

The performance of the purchasing managers’ index is an important driver of events on the US financial markets. Viewed over longer periods, there is a clear positive correlation between changes in 10yr government bond yields and the changes in the ISM index. As a pivotal economic indicator it evidently influences key rate expectations on the markets and prompts portfolio shifts between government bonds and risky financial assets. Accordingly, in the event of a sustained improvement in this indicator, we are likely to see 10yr government bonds come under selling pressure.


Thomas Hofmann
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