Recap 2-03-14 : Left Field


Well, I‘d thought there would be a sentiment driven correction, but I didn’t think it would be supported by the data, at least not yet. The ISM print today is pretty bad, and surprising given the regional prints, which pointed to a broadly stable print today. The chart below shows the regression of ISM vs the regional PMI’s – you can see how unusually big this error term is: (~2.6 Std Devs)

Obviously, I wasn’t the only one who was surprised. But the size of the miss suggests that this is more than just noise or weather – there is likely to have been at least some fundamental weakening in the trend.

What does this mean? Well, PMI prints are widely watched because of their timeliness and accuracy at indicating economic activity. They are often key leading indicators for earnings, for example. As a result, it makes sense that they have a strong impact on short term movements in equity prices. However, historically the bulk of the impact has been limited to the months immediately following the ISM local high. The chart below shows the S&P in orange and ISM in white, along with vertical lines indicating peaks and troughs in the ISM. As the chart shows, outside of recessions, the S&P usually follows ISM peaks with some sideways price action before resuming the bull trend. 2011 was an exception, but arguably fears of an implosion in the European financial system were a bigger driver.

This relationship also held through the 80’s and 90’s:

The impact on rates markets are a bit stronger, but varies based on whether the trajectory of Fed policy is changed or not. Current market pricing does not imply a change.

So – what does this mean going forward? I think the key question is how much farther this growth slowdown goes. There is a decent chance that despite a bounce next month, the slowdown continues into 2Q as the impact of higher rates are finally felt. This scenario may be noted by the Fed in March and, depending on the severity, cause the Fed to delay its tightening schedule. Much will depend on the evolution of the employment figures later this week and early next month. The consensus scenario at this juncture is a recovery back to the low 50’s print next month.

A final factor to consider is the length of time that this correction has taken. Outside of recessions, correction moves tend to be front loaded, and as downward momentum slows, equity prices start forming a base before resuming their upward trend. However, this sell off is just a couple weeks old, whereas historically these moves tend to last at least 4 weeks. So that factor suggests some more downside.


  • PMIs :
  1. US ISM dropped sharply to 51.3 in Jan vs 56 exp and 56.5 prev, only the 4th time in the past 20 years that ISM has fallen by more than 5 pts.
  2. UK Mfg PMI dropped to 56.7 vs 57.3 exp and prev
  3. EU Mfg PMI improved to 54.0 vs 53.9 exp and prev. Italy declined to 53.1 vs 53.2 exp and 53.3 prev, but the French print was revised up to 49.3 vs 48.8
  4. China Non-Mfg PMI declined to 53.4 vs 54.6
  5. Australia Mfg PMI declined to 46.7 vs 47.6 prev

Australia Building Approvals declined to 21.8% YoY vs 23.4% exp and 22.2% prev

Der Spiegel said the German Finance ministry has signaled preparation of a third Greek bailout with a new loan worth 10-20bn.

Upcoming Data:

  • Mon: RBA
  • Tue: UK PMI Construction
  • Wed: EU Services PMI, US ADP, CanadaBuilding Permits, ISM Non-Mfg, Australia Retail Sales,
  • Thu: BoE, ECB, Canada Trade, US Jobless Claims, Unit Labor Costs, RBA Statement, China HSBC Services PMI
  • Fri: US Employment, Canada Employment,