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What Poor ISM Manufacturing Data Means for Fed, Interest Rates, Stocks

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The ISM Manufacturing index showed U.S. economic activity slowing to an alarming level Tuesday, and that has clear implication for the direction of interest rates and stocks. 

Here's the news first. 

Manufacturing Data Missed and Contracted 

The ISM index read 47.8 for the month of September, missing economists estimates of 50.1. Any result below 50 is a contraction. This follows the Europeans Union's manufacturing contraction to 45.6 for the month of September, missing economists estimates of 47.3, and below August's result of 47. 

The U.S. and China trade is weighing on economic growth as businesses invest less while uncertainty over the direction of tariffs -- some of which are scheduled to go into effect in December -- remains a theme among American corporations. U.S. GDP has been largely trending downward from near 4% in second of 2018 to roughly 2% recently. President Trump and Chinese leader Xi Jinping are scheduled to meet early in October to discuss trade. 

Stocks Down 

The S&P 500 fell 0.85% and the Dow Jones Industrial Average fell 0.97%. Industrial stocks on the DJIA were lagging the falling index, with Caterpillar (CAT) - Get Caterpillar Inc. Report losing 1.85% to $123.97 a share, 3M (MMM) - Get 3M Company Report falling 2.53% to $160.26 a share, United Technologies (UTX) - Get n.a. Report down 2.04% to $ 133.81. 

Treasury Yields Down 

The benchmark 10-year treasury yield fell to 1.62%, while the 30-year treasury yield fell to 2.09%.

Meanwhile, the 3-month yield rose briefly to 1.83%, before dropping into the red a tick to 1.82%. Still, the 3-month's momentary uptick and then its less pronounced drop signifies an incrementally worsening inversion of the yield curve. This has been a reliable recession predictor in the past, as investors flock into longer dated paper, accepting lower yields, as growth and inflation expectations remain low. 

The probability of another Federal Reserve interest rate cut rose to 53%, according to CME Group Data, up from 43% Monday. 

With yields lower, bank stocks performed particularly badly. Morgan Stanley (MS) - Get Morgan Stanley Report share fell 2.30% to $41.72 a share. Goldman Sachs (GS) - Get Goldman Sachs Group Inc. (The) Report fell 1.24% to $204.66 a share. Wells Fargo (WFC) - Get Wells Fargo & Company Report fell 1.98% to $49.44. Bank of America (BAC) - Get Bank of America Corporation Report fell 1.61% to $28.70. 

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