economy Markets

China And The Virus Aren’t The Only Things To Trade On This Week…

Misses could exacerbate the bond rally. Beats may assuage fears.

Market participants will, of course, spend most of the new week obsessing over each and every development in the unfolding coronavirus pandemic.

At last check, the death toll was over 350, including a man from Wuhan who traveled to the Philippines and subsequently became the first person to die outside China from the virus. Total infections rose above 17,000, according to a statement from the Ministry of Health.

But the virus won’t be the only thing to trade on, even if it does garner the lion’s share of the press. For months, ISM manufacturing has been the outlier in terms of first- and second-tier US data. The gauge has remained stubbornly below 50, even as other key data inflected for the better. December’s 47.2 print was the worst since 2009, and came as a bitter disappointment when it hit early last month.

Monday, we’ll get January’s print. If it’s still below 50, it will be the sixth consecutive month in contraction.

It’s also worth noting that the market will likely be especially sensitive to any further sign of manufacturing weakness in the US after Friday’s disastrous Chicago PMI miss. A lackluster ISM print would be seen (rightly or wrongly) as “confirmatory”. (And the scare quotes are there for a reason.)

On the other hand, a better-than-expected ISM number would lend credence to the notion that the Chicago barometer simply cannot be relied upon for anything other than scary-sounding headlines. (With apologies to MNI.)

We’ll also get payrolls this week. December’s report was passable, but did suggest the labor market is cooling. For 2019 as a whole, the US economy added 2.11 million jobs, around a quarter-million more than economists forecast a year ago. And yet, that was the slowest pace since 2011 and marked a steep decline from the 2.68 million jobs the economy added in 2018.

In the context of ISM, I really hesitate to even use the chart. Frankly, it’s a bit disconcerting and may well qualify as a “chart crime”.

But hell, I’ve used it before, so here you go, sports fans:

Things don’t look much better when you plot ISM with GDP. Although the headline on the advance read for fourth quarter GDP beat estimates, a quick look under the hood showed personal consumption falling sharply and business spending declining for a third straight quarter, the worst such stretch since 2009.

December’s ISM manufacturing print suggests the US economy is growing at just 1.3% annualized, far below the 2.1% advance read for Q4.

All of this makes for a pretty dramatic setup for this week’s raft of US data, which also includes ADP, ISM services and factory orders.

As if it needed to get any more interesting, we’re coming off the best week for bonds in months, which means any misses on the data front (without any offsetting positive headlines around the virus scare), could well push yields even lower.

Read more: Jeff Gundlach Probably About 90% Correct To Say Chances Of Fed Cut Are About 90%

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