{"id":182732,"date":"2022-12-01T17:30:00","date_gmt":"2022-12-01T22:30:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/traders-insight\/investor-sentiment-turns-negative-as-ism-contracts\/"},"modified":"2023-02-09T15:49:35","modified_gmt":"2023-02-09T20:49:35","slug":"investor-sentiment-turns-negative-as-ism-contracts","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/investor-sentiment-turns-negative-as-ism-contracts\/","title":{"rendered":"Investor Sentiment Turns Negative as ISM Contracts"},"content":{"rendered":"\n

Economic updates released today and Federal Reserve Chairman Jerome Powell comments paint a somewhat favorable outlook for the war on inflation, but investors are reacting to the developments with mixed emotions as they examine the demand picture.<\/p>\n\n\n\n

Yesterday, Powell hinted at continued rate increases, additional balance sheet reductions and a likely higher-than-anticipated terminal rate, but investors focused on his comments about the central bank moderating the pace of rate hikes and the Chairman\u2019s belief in the ongoing possibility of a soft landing. This optimism and accompanying equity rally were sustained early this morning by the Core PCE Index showing a slight moderation in inflation. Sometimes, however, good news is followed by bad news, at least in the eyes of investors who reacted negatively to this morning\u2019s ISM Purchasing Managers’ Index (PMI). The PMI contracted for the first time since the spring of 2020 against the backdrop of weak new orders, employment and prices. While the ISM has dampened investor sentiment by pointing to future declines in corporate earnings, its weakness implies that the Federal Reserve\u2019s rate hikes are weakening demand for products and services, thereby providing additional fodder for optimism that the central bank will slow its rate hikes. The PCE and ISM reports are providing mixed signals as investors grapple with focusing on either slower inflation and lower yields or slower demand and reduced earnings. Equities are now giving back some of the gains from yesterday, with yields and the dollar down as well.<\/p>\n\n\n\n

Today\u2019s PMI of 49 was the lowest level since the 43.5 seen during the depths of the COVID-19 pandemic in May 2020. Today\u2019s number fell short of consensus expectations for a 49.8 reading and was worse than October\u2019s 50.2 level. The report confirms the deterioration of manufacturing, which we covered last week in our commentary, \u201cManufacturing Slips Deep into Contraction Territory While Layoffs Rise Markedly<\/a>\u201d based on the PMI flash release from S&P Global. In today\u2019s ISM report, new orders slipped further into contraction territory, employment entered contraction land and prices fell to the lowest index level since May 2020, illustrating deflationary pressures in goods but sparking concerns about earnings and economic growth prospects.<\/p>\n\n\n\n

The Core PCE Price Index climbed 5.0% year over year (y\/y) and 0.2% month over month (m\/m) in October, near market expectations of 5.0% and 0.3%, respectively, and cooler than September\u2019s readings of 5.2% and 0.5%. The general PCE Price Index, which includes food and energy, increased 6.0% y\/y and 0.3% m\/m.<\/p>\n\n\n\n

The PCE also showed that personal income increased 0.7% versus the 0.4% consensus expected, while personal spending came in-line at 0.8%. This increasing spending rate is unlikely to be sustainable for various reasons:<\/p>\n\n\n\n