Yesterday’s reaction to dovish comments from Fed chair Powell was most certainly welcomed by the markets. Big positive moves in risk assets and lower yields across the board. This wasn’t the end but, as Winston Churchill said, perhaps the end of the beginning of this extended period of market volatility. One day doesn’t make a move, however – the market needs to follow through over the near term to confirm a trend.
The other big story yesterday was that the market quickly shrugged off very weak Chicago PMI data. This index is a broad snapshot of industrial economic activity. A reading of >50 signals economic growth and a reading of < 50 signal economic contraction. Yesterday’s reading was an abysmal 37, the lowest reading since the darkest days of COVID in March/April 2020. Much worse than any estimates on it. The shaded pink areas in the chart below note past recessions. There’s never been a Chicago PMI reading of <45 (remember, yesterday’s was a weak 37) when the economy wasn’t either in a recession or about to be in a recession. Ultimately rate hikes do destroy demand.
Fear not, the market is a forward-looking beast and knows this info already. To really get the market going higher, the Fed needs a pivot with regards to rate policy and that pivot will likely come from a combination of lower inflation readings and weak labor data. All eyes on Friday 8:30am EST non-farm payroll report. The market would LOVE a weak report. When you get hit by a once-in-a century global pandemic, down is up, good is bad, tall is short, fat is thin etc., etc., etc.
Chicago Purchasing Managers Index
Richard Barrett
Chief Investment Officer
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