ISM index slips, but still healthy
The comments that follow are from Scott Grannis, Chief Economist at Western Asset Management...
The Institute for Supply Management's index of manufacturing activity for December was weaker than expected (54.2 vs. 57.5). But as the chart shows, the current level is still consistent with the 3-4% range of real economic growth that we have been expecting.
The prices paid component also came in lower than expected (63 vs. 68.7), but is still elevated, having averaged about 56 for the past 15 years.
Softer growth seems to be the theme that is guiding the bond market these days, slowly trumping concerns that inflation may remain a problem. 10-year Treasury yields remain within the tranquil 4 - 4.5% range that has prevailed for the past two and a half years, despite the 3.0% annualized rise in the CPI over that same period. TIPS breakeven spreads are 1.9% for the next year and 2.3% for the next 5 and 10 years.
With the Fed expected to tighten only two more times, the dollar has lost support on the margin and is down 1% today and unchanged for the past six months, while gold remains firmly bid, up $11 today to $528/oz. Oil is up $2 to $63, and industrial commodity prices are at or near all-time highs. The bond market may be sanguine about the outlook for inflation, but not all indicators are consistent with this optimism.
Thus the new year opens with conflicting signals on what are arguably the most important topics for the year: the outlook for the economy, inflation, bond yields, and Fed policy. Will the economy slow down, and will slower growth bring inflation down? Or will inflation remain somewhat elevated, as suggested by gold prices? If the economy slows and inflation remains somewhat elevated (e.g., a core PCE deflator that rises to 2.5% or so), which indicator will the Fed choose to guide future policy decisions? Answers to these questions could be a lot more exciting than the humdrum market action we've seen of late.
The Institute for Supply Management's index of manufacturing activity for December was weaker than expected (54.2 vs. 57.5). But as the chart shows, the current level is still consistent with the 3-4% range of real economic growth that we have been expecting.
The prices paid component also came in lower than expected (63 vs. 68.7), but is still elevated, having averaged about 56 for the past 15 years.
Softer growth seems to be the theme that is guiding the bond market these days, slowly trumping concerns that inflation may remain a problem. 10-year Treasury yields remain within the tranquil 4 - 4.5% range that has prevailed for the past two and a half years, despite the 3.0% annualized rise in the CPI over that same period. TIPS breakeven spreads are 1.9% for the next year and 2.3% for the next 5 and 10 years.
With the Fed expected to tighten only two more times, the dollar has lost support on the margin and is down 1% today and unchanged for the past six months, while gold remains firmly bid, up $11 today to $528/oz. Oil is up $2 to $63, and industrial commodity prices are at or near all-time highs. The bond market may be sanguine about the outlook for inflation, but not all indicators are consistent with this optimism.
Thus the new year opens with conflicting signals on what are arguably the most important topics for the year: the outlook for the economy, inflation, bond yields, and Fed policy. Will the economy slow down, and will slower growth bring inflation down? Or will inflation remain somewhat elevated, as suggested by gold prices? If the economy slows and inflation remains somewhat elevated (e.g., a core PCE deflator that rises to 2.5% or so), which indicator will the Fed choose to guide future policy decisions? Answers to these questions could be a lot more exciting than the humdrum market action we've seen of late.
posted by David M Gordon | 5:55 AM
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