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Daily Market Commentary

Yesterday's horrible ISM Manufacturing number at 47.7 sparked a massive rally in the fixed income market, and for once most credit was along for the ride.  Credit spreads yesterday maintained their level despite the poor economic news.  All bonds rallied, particularly in the short end, and the yield curve steepened significantly.  Remember that 50 is the "boom/bust" line for this number.  Typically when the print falls below 50, we've got some problems in the economy and the Fed takes notice.  The chart in the Daily FI Snapshot clearly shows that the Fed acts, and sometimes aggressively, virtually every time the ISM drops below 50.

 

To make matters worse, the ISM prices paid component printed much higher than expected - once again raising the dreaded prospect of stagflation.

 

 

  This morning, the curve is once again steeper, as it should be when stagflation worries abound, although bonds are mixed.  Jobless claims came along mostly as anticipated this morning, and the ADP employment change numbers, which always lead the US big employment numbers by one day and provide an indication of where they will be, also came in as expected.  They show a big drop in jobs added this month over last month, and November was revised downwards, but it's still hovering around flatline for December.  A very weak jobs number tomorrow combined with yesterday's ISM number could cause the Fed to start cutting more aggressively.  Inflation is still their main concern, but they are increasingly stuck between and rock and a hard place.

 

 



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