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US: Recent Weak Data a Cause for Concern?

7 October 2019EconomicsPolitics

Early October market volatility appears to be more of a reaction to weak US data than to US political developments. Both the ongoing impeachment inquiry as well as changes in the polls for the Democratic nominee have made headlines in recent days. However, recent sector moves show cyclical sectors such as tech, industrials and financials underperforming and the more defensive real estate, utilities and health care sectors outperforming, consistent with a typical growth-driven risk-off move. Should US political risk be the source of market volatility, Citi analysts would expect to see health care lag.

US: Recent Weak Data a Cause for Concern?
Past performance is no guarantee of future results, real results may vary. Forecasts are expressions of opinion, are not a guarantee of future results and are subject to change.

Last Thursday, the 52.6 ISM non-manufacturing index reading in September was much weaker than Citi analysts (55.4) or consensus (55.0) had expected. Furthermore on last Tuesday, ISM manufacturing also fell to 47.8 in September, well below consensus expectations at 50.0 and Citi at 50.8. A reading below 50 signals a contraction.

While small as a sector, the direction of manufacturing is indicative of the direction of broader US growth. However, the volatility of the sector is much larger than the less cyclical business such as services, which do not have inventories to rise or fall sharply. While Citi analysts expect the US and global manufacturing downturn to negatively impact consumers, the starting point of healthy fundamentals and the strong demand growth may limit the contraction in manufacturing. Trade tensions, of course, are the wild card.

Following the weak data, a further 25bp rate cut in 2019 is now the likely case and could come as early as October. However, Citi analysts think a larger 50bp cut in October remains unlikely.

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