The markets sold off in early morning trading after the Institute for Supply Management (ISM) released their manufacturing report. The index fell 3.1 points in December to 47.7, putting it below the expansionary threshold of 50.0 for the first time since January of last year. December’s decline also marked the sixth consecutive decline in the overall manufacturing index, something that hasn’t happened since late 2000 into 2001 just prior to the last recession.
Figure 1
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Source: Moody’s Economy.com
Manufacturing activity is likely to continue to decelerate as customer inventories are building, which then leads to a decline in new orders as retailers work off rising inventory levels. The inventory and new orders indices typically move in opposite directions as seen in the chart below. The chart also shows the inventory index rising above 50 with the new orders index breaking below 50, a development last seen before the 2001 recession. In 2006 the inventory index breached 50 though the new orders index did not.
Figure 2
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Source: Moody’s Economy.com
Additional negative news came out with the release of the Case-Shiller Home Price Index, which showed housing prices declined nationally by 4.5% on a year-over-year (YOY) basis in the third quarter, marking the largest decline in the index’s 32-year history. Moreover, the pace of the decline has steepened, not slowing as a housing bottom continues to be elusive as prices fell an annualized 7.2% rate in the third quarter. The current housing decline is deeper and more broad-based than any decline seen in the Case-Shiller index whose history goes back to 1975. With data like this it is understandable for the markets to react by selling off.
Figure 3
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Source: Moody’s Economy.com, DismalScientist
Adding insult to injury, West Texas Intermediate crude (WTIC) oil briefly hit the 0/barrel mark on the one month futures contract before retreating slightly. Also rallying was gold which hit a record high, jumping .30 to 1.30 per ounce by mid-day trading. Oil and gold weren’t the only commodities seeing gains to start the new year as the CRB index was up 2.27% on the day, while the dollar finished lower.
Figure 4
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Source: StockCharts.com
Figure 5
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Source: StockCharts.com
Figure 6
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Source: StockCharts.com
Figure 7
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Source: StockCharts.com
With manufacturing activity in contractionary territory, home prices falling, and commodities surging, it’s not hard to see why the markets today were decidedly down. The ISM report and Case-Shiller home price index highlight a weak economy that has the potential to decelerate even further while rising commodity prices highlight inflationary risks that remain despite a slowing economy (stagflation?). Inflation fears are well supported with the PPI breaking out to YOY levels not seen since the 1980s, food inflation near 17-year highs, and the headline CPI jumping north of 4% and the core CPI remaining above the Fed’s 2% comfort zone. Thus, the Fed finds itself between a rock and a hard place as lowering interest rates would help support the economy while also stoking fears of inflation and a weaker dollar.
Figure 8
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Source: Moody’s Economy.com
Figure 9
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Source: Moody’s Economy.com
Figure 10
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Source: Moody’s Economy.com
The markets sold off with the uncertainty of a Fed rate cut amidst rising commodity prices. The Dow Jones Industrial Average posted a triple-digit decline, falling 220.86 points to close at 13043.96 (-1.67%), the S&P 500 lost 21.20 points to close at 1447.16 (-1.44%), and the NASDAQ shed 42.65 points to close at 2609.63 (-1.61%).
Treasuries rose with the yield on the 10-year note falling 13.4 basis points to close below the 4% level at 3.901%. The dollar index was down, falling 0.65 points to close at 76.01. Advancing issues represented 41 and 33% for the NYSE and NASDAQ respectively.
