The U.S. manufacturing sector continued to expand in August but the moderating pace and its steady decline since March combined with the continuing contraction in Chinese production futher undermined the Federal Reserve case for a September rate increase. Treasury rates declined and the dollar fell to its lowest against the euro since mid-May.
Markit Economics reported today that its U.S. flash purchasing managers' index for July dipped to 52.9 from 53.8 the prior month. Economists had forecast a slight rise to 54.0. This year's high was 55.7 in March.
In China the weakest manufacturing reading since the financial crisis kept pressure on Asian equities and commodity prices. The Caixin China Services PMI, also from Markit Economics came in at 47.1 for August well below the 47.7 median estimate and July's 47.8 measure. It was the 11th straight month below 50 for the hard-pressed Chinese manufacturing industry. Scores above 50 in both indexes indicate sector expansion.
The dollar sank as low as 1.1359 in New York at 11:53 am. The euro has gained 3 percent since the close on Tuesday. Wednesday's release of the unexpectedly dovish Fed minutes from the July 28-29 FOMC meeting cast serious doubt on the central bank's willingness to raise interest rates for the first time in eight years next month. The ongoing global equity and commodity sell-offs will only complicate the Fed's policy dilemma.
The central bank has repeatedly stated that it intends to begin to 'normalize' interest rate policy as soon as the economy is strong enough, citing a needed "some further improvement" in labor markets and inflation trending towards its 2 percent target in the medium term.
The Fed's primary rate benchmark, the Fed Funds rate has been at a 0.25 percent upper limit for an historically unprecendeted seven years. The Fed has offered little guidance as to what a 'normal' Fed Funds rate might be in the current economic circumstances.
Treasury rates have moved appreciably lower with the diminishing chance of a September rate hike. The rate on the generic 10-year Treasury has lost 13 basis points since the close on Tuesday and was yielding 2.06 percent at 11:30 am in New York. The yield on the 2-year was 0.6128 percent at 11:53 am, off 4 basis points today and 10 since Tuesday's settlement.
Last week's surprise devaluation of the Chinese yuan has set off competitive devaluations in many emerging markets currencies, with the most violent a 22 percent drop in the Kazakhstan Tenge.
European and Asian shares were uniformly lower, with several exchanges headed for correction territory. The Shanghai Composite dropped 4.3 percent bringing its loss for the week to 10 percent and within one point of erasing all the gains instilled by government invervention.
Emerging-markets bourses experienced the biggest weekly declines in two years. Equities in Hong Kong, Indonesia and Taiwan entered bear markets, defined as down 20 percent or more from the high and junk bond yields worldwide rose to the highest level since October 2012.
Crude oil traders are enduring the commodity's longest weekly losing streak since 1986. West Texas Intermediate is down 14.7 percent this month and 33.3 percent since June 1st. Copper has extended a rout that has seen prices sink to the lowest level in more than six years.
The turmoil in world financial markets that began with the collaspe of China's equity markets is really only the symptom of the declining prospects for global economic growth. The commodity indexes has been signalling danger for many months.
The world's central bankers, intent for six years on promoting economic expansion with the only tool they have, low interest rates, now have few policy choices left should the globe slip into recesson. This time the world economy may have to heal itself.
Chief Market Strategist
WorldWideMarkets Online Trading