The German 2 yr yield has now risen 28 bps over the past 4 days with today’s 5 bp increase coinciding with the higher than expected February CPI print. German CPI rose 1% m/o/m, 3 tenths more than expected and the y/o/y increase was 9.3%, up from 9.2% in January. No wonder the Bundesbank head is talking about speeding up QT in Q3. The 10 yr inflation breakeven is higher by 3.5 bps to 2.54% in response and that is the highest since May 2022. And US yields are ticking up in sympathy.
The February ISM manufacturing index was 47.7 vs 47.4 in January but below the estimate of 48 and less than 50 for the 4th straight month. The last time we had 4 months in a row below 50 not including covid was in the last 5 months of 2019 thanks to the China tariffs (that I despise and which US companies are continuing to pay for).
New orders are below 50 for the 6th straight month but did lift to 47 from 42.5. Backlogs are under 50 for a 5th month at 45.1 vs 43.4 in January. Employment dipped back below 50 at 49.1 and is in contraction for the 4th month in the past 6. Inventory levels were little changed m/o/m at around 50 and export orders are under 50 for a 7th month. Supplier deliveries were little changed but also below 50. Prices paid rebounded back above 50, up 6.8 pts to 51.3, a 5 month high.
The breadth improved slightly as 4 companies of 18 surveyed saw growth vs just 2 in January. Those seeing a contraction totaled 14 vs 15 last month. Chemicals remained below 50 but a bit less so while transportation saw expansion.
Defining the GDP impact, ISM said “82% of manufacturing GDP is contracting, down from 86% in January.”
I don’t think we get a full picture on US manufacturing unless we also look at the S&P Global report which includes small and medium sized businesses as well as large ones. Their index is also below 50 and they said today, “The deterioration in operating conditions stemmed largely from further contractions in output and new orders, although rates of growth slowed in both instances. Weak domestic and foreign client demand reportedly drove a further drop in total new sales as firms adjusted their spending activity and inventory holdings down accordingly.” In contrast to ISM, employment did improve.
Also as seen in ISM, “the rate of charge inflation accelerated again to a marked pace as firms sought to pass on higher costs to customers. Conversely, input costs increased at a softer rate.”
Bottom line, the US manufacturing sector remains in a recession. We’ll see in the coming months what the China reopening impact will be in terms of not just helping their economy but others in the Asian region and in Europe too and how US exports respond to that.