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Richard Franulovich, head of FX strategy at Westpac, explains that the US manufacturing ISM posted an eye-catching fall deeper into contractionary levels in September.

Key Quotes

“US equities have a noisy but respectable positive relationship with the ISM index and appear somewhat expensive versus the contractionary momentum in the ISM.”

“The momentum in US fixed income yields has slavishly tracked the ISM for almost twenty years. US10yr yields have fallen 165bp in the last year and that is perfectly consistent with the decline in the ISM manufacturing index over the past year.”

“The USD if anything trades inversely with the ISM (understandable given the USD will be an important driver of manufacturing). In any case a contractionary ISM is perfectly consistent with an elevated USD.”

“The big picture conclusions are that: 1) the sharp decline in US yields in the last year is not overdone; 2) the USD can and will defy a contractionary ISM; and 3) equities appear overdone when judged against the contractionary momentum in the ISM.”