US Macro: Manufacturing yet to find a bottom – The ISM manufacturing PMI fell to a 10-year low in September, and at 47.8, is now just above the 46.3 level registered in the last month of the 2008-9 recession. The details were no less concerning, with the forward-looking new orders index stable at quite weak levels (47.3), while the employment index fell to 46.3 (from 47.4), suggesting a further slowing in manufacturing payrolls – the sector having already been responsible for the bulk of the decline in jobs growth in recent months (nonfarm payrolls gains have slowed from a monthly average of +223k in 2018, to +158k in the year to date). New export orders paint an even gloomier picture – at 41.0, the index is lower than during the pre-2008 recession periods. Given the primary driver of the manufacturing weakness – the US-China trade war – is unlikely to see any resolution any time soon, the best that can be hoped for is a stabilisation at weak levels, rather than a meaningful recovery. Our base case is that existing tariffs will not be repealed, and if anything tensions may escalate further.
While the slowdown in manufacturing by itself will not push the US into a recession, we do expect the knock-on effects to drive a broader slowdown, primarily via lower jobs growth. We expect payrolls growth to slow further over the coming months, with the monthly average perhaps dipping below +100k in 2020. While a modest acceleration in wage growth will cushion some of the blow, it will not fully offset the hit to aggregate income growth in the US. As a result, we expect private consumption – 70% of the US economy – also to slow by the end of 2019 and into 2020. Combined with continued sluggishness in investment (which the new orders index suggests if anything could intensify) and weaker government spending, we expect quarterly annualised GDP growth is slow to sub-trend rates of 1-1.5% by Q4 2019/Q1 2020.
What does this mean for the Fed? Committee members were noncommittal at the September FOMC, with even doves projecting just one further rate cut, but our base case is that a continued weakening in macro data will convince more sceptical members to support cuts at the coming meetings. We therefore expect 25bp cuts at both the October and December FOMC meetings, with the Fed pausing in 2020. OIS forwards meanwhile are pricing in one cut this year, and one cut in 2020. (Bill Diviney)