Slumping Chicago PMI – Ignore or Follow?

<p>The 14-pt drop in the February Chicago PMI to 45.8 is the biggest decline since October 2008 and the lowest level since Jul 2009. The […]</p>

The 14-pt drop in the February Chicago PMI to 45.8 is the biggest decline since October 2008 and the lowest level since Jul 2009. The sharp fall is attributed to inclement weather conditions (North East) and port-related delays (West Coast). Employment, new orders and production components all fell to contraction territory. To what extent will nationwide factors (weather & port strikes) will impact next week’s release of the February jobs report remains a question for the Fed meeting a few weeks later.

Optimists hold that previous sharp declines in the Chicago PMI were followed by strong rebounds, but we must note the positive correlation between the Chicago PMI and the manufacturing ISM (due Monday), which could imply a figure of sub-50 in the latter versus expectations of 53.2.

The last time the index fell by more than 10 points was in October 2008, when the financial crisis unleashed brought a standstill to manufacturing activity and jobs losses escalated for the months to follow. If the chain reaction of disappointing Chicago PMI ==> weak manuf ISM ==> sub 200K in NFP materializes next week alongside weakness in average hourly earnings, then the FOMC would find little reason to drop the patience guidance in March.

Dudley warns of premature rate hike

So far this year, the voting members of this year’s FOMC (San Francisco’s Fed Williams, Atlanta Fed’s Lockhart and Richmond Fed’s Lacker) have all spoken in favour of raising rates in June, by highlighting the dangers of waiting too long before starting to normalize rates. Until today, Chicago Fed’s Evans was the only dovish voter who said the Fed “shouldn’t be raising rates before 2016 if things transpire as [he is] expecting”.

FRBNY president Dudley broke the silence and gave his first speech of the year, stating the “risks of lifting the fed funds rate off the zero lower bound a bit early are higher than the risks of lifting off a bit late. This argues for a more inertial approach to policy.”

Yields still at odds with Fed

Considering that most FOMC member forecasts expects rates above 2% by end of 2016 compared to the bond market’s 1.5% view, then a decision by the FOMC to drop “patience” from the March FOMC will trigger a sharp catch-up in bond yields, that will provide detrimental to equities in April-May, as has usually been the case over the last 5 years each time June coincided with the end of a Fed stimulus package.

Chicago PMI Feb 27 2015

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.