Stronger-than-expected manufacturing data shifts focus to higher yields and a firmer dollar, pressuring rate-sensitive and commodity futures.
U.S. manufacturing activity expanded slightly in January, but the growth was more than expected, according to twin reports released on Monday. The data sent the equity market higher and pushed up bond yields, while also boosting the U.S. dollar.
The commodity futures, however, did not budge and were lower across the board.
Manufacturing Springs Back To Life: The Institute for Supply Management’s (ISM) manufacturing purchasing managers’ index rose 4.7 points to 52.6 in January, signaling an expansion after 26 consecutive quarters of contraction. Economists had expected a reading of 48.5 for the month. Among the components:
- The new orders index jumped nearly 10 points to 57.1. (expanding for the first time since August and marking the highest reading since Feb.2022)
- The production index climbed 5.2 points to 55.9. (also the highest since Feb. 2022)
- The prices index edged up 0.5 points to 59.
- The backlog of orders Index moved up 5.8 points to 51.6, the highest reading since Aug, 2022 (53 percent).
- The employment Index, while rising 3.3 points, came in at 44.8.
ISM Manufacturing Business Survey Committee chair Susan Spence said, “In January, U.S. manufacturing activity returned to expansion territory, with improvements in all five subindexes that make up the PMI (New Orders, Production, Employment, Supplier Deliveries, and Inventories), though the Employment and Inventories indexes still remain in contraction.”
Separately, S&P Global released the results of its final manufacturing survey for January, showing that the U.S. manufacturing sector expanded at a faster rate than estimated in January. The corresponding PMI came in at 52.4, up from the flash estimate of 51.9 and December’s 51.8.
S&P Global attributed the rise in part to a renewed rise in new orders, although growth was modest and below the survey average. Exports remained weak, falling for the seventh month in a row as tariffs and the ongoing trade uncertainties weighed on sales, especially to South American and European clients. Production increased at a sharp pace, rendering the output growth notably faster than new orders.
S&P Global Market Intelligence Chief Economist Chris Williamson said, “News of the joint largest rise in factory production since May 2022 is tainted by reports of ongoing subdued sales growth.”
Implications for Rates and Financial Assets: The strong manufacturing data has increased the odds of a rate hike, which in turn is positive for the dollar and risky bets. The dollar-denominated commodity futures, which are on a slump since President Donald Trump nominated Kevin Warsh to the post of the Fed chair, extended their slide.
LPL Chief Technical Strategist Adam Turnquist sees the commodity sell-off as much more than a reaction to Warsh’s nomination. “When price action enters the later stages of a parabolic trend, fear of missing out turns into fear of losses, leaving investors on edge and looking for excuses to take profits,” the strategist said, adding that the Warsh decision and subsequent bounce in the dollar provided that excuse on Friday.
The E-mini S&P 500 futures are higher, rising back above the 7,000 mark. E-mini Russell 2000 futures (RTY) has also joined the party, outperforming the ES, by rising nearly 1.50% despite higher rates being a clear negative for small-cap stocks. The contraction in labor market activity potentially rendered hopes that interest rates would stay accommodative.