Only a few weeks ago, top-of-mind risk for market participants was the trade war, according to BAML’s Global Fund Manager Survey. Now it is highly likely the list would be topped by tensions in the Middle East after the US assassination of the Iranian general, Qasem Soleimani. One Fed official, Richmond President Thomas Barkin, has already cited it as a recession risk. But the ISM is more immediately relevant for the US economy, and we would not read too much into the further drop in the index reported earlier this month.

While the headline number was the fifth sub-50 print in a row, the real information content comes from the sub-indices, specifically the new orders-to-inventory ratio. We can see in the top-left chart this ratio on a 3m smoothed basis is staying above the critical level of 1, which points to a pick-up in the headline number soon. This is corroborated in the top-right chart, which shows the lagged effects of lower global central-bank rates should support the ISM in the coming months. Moreover, for a sub-50 ISM to be worrisome from a recession point-of-view, we need to see the new orders-to-inventory ratio going materially below 1, which it has not so far done today (bottom-left chart). Finally, the wedge between the ISM and the PMI is growing, with the PMI rising even while the ISM is falling (last chart). This is perhaps explained by the ISM survey being more geared to larger firms, therefore more internationally focused and sensitive to trade.

(Click on image to enlarge)

Source: Bloomberg, Macrobond, Variant Perception