Expansion Is Good
So why the mini sell-off?
Monday was a classic good-news-is-bad-news down day.Stocks opened the first session of the new month on a positive note but turned negative shortly after the release of fresh reports on US manufacturing.
Investors, traders, and speculators read the data and understood it to mean the Federal Reserve might be less likely to announce a rate cut in June.
The key here is that the Institute of Supply Management’s manufacturing index showed expanding activity in March for the first time since September 2022.
It was up by 2.5 percentage points from 47.8 in February to 50.3 – 50 is the dividing line between “contraction” and “expansion.”
We’d seen sixteen consecutive months of contraction until yesterday morning.
New orders rose 2.2 percentage points back into expansion territory at 51.4, up from 49.2 in February. And employment contracted less than in February, rising 1.5 percentage points to 47.4 in March from 45.9.
The ISM said that food, beverage and tobacco products, fabricated metal products, chemical products, and transportation equipment, which are among the six biggest manufacturing industries and account for a combined 54 percent of manufacturing gross domestic product, all reported expansion in March.
ISM Manufacturing Business Survey Committee Chair Timothy Fiore said in a statement accompanying the data release that demand “remains at the early stages of recovery, with clear signs of improving conditions.”
OK, but…
Markets are forward-looking, and, as Mish Schneider observes in her Weekly Market Outlook, one particular vehicle is showing some skeptical signs.
We entered April and the second quarter with the major equity indexes at all-time highs. Meanwhile, the iShares iBoxx High Yield Corporate Bond ETF $HYG is well off its highs and tested major support on Monday.
Junk bonds are a pretty good barometer for whether we’re in a “risk on” or a “risk off” environment.
We have incoming data on factory orders and job openings today as well as speeches from two Fed presidents and a Fed governor. On Wednesday, we’ll hear from Fed Chair Jerome Powell again.
It’s all pointing to Friday’s release of March nonfarm payroll data, though, and how that big piece fits into the inflation-and-rate-cuts narrative.
But the price action goes on.
