KG on PMI's Market Shock, 10-Year Yield Near Two Decade Highs

SPEAKER_1 (0:00)

So, that's how we're looking. So, let's dig into some of this data and exactly what we got here as to why we've seen this move in the market this morning. I'm joined by Kevin Green, as always.

To have a look at this, strong PMIs. Obviously, the September read here, the Flash S&P Global, I mean, manufacturing 57 services, 58.7. I mean, much higher than the expectations here, KG. And then obviously, seeing that 10-year reacting to that data quite swiftly to the upside. Just walk us through what we got and the significance.

Kevin Green (0:35)

Yes, as you kind of talked about here, services PMI came in at 58.7. Street was looking for 55.8. And if you're looking at the manufacturing PMI, they came in at 57 Even Street was looking for 53.6. Now, if we actually take a look under the hood here, the Flash overall composite PMI came in at 58.4. Street was looking for 56 even. This is the fastest pace of growth on a month-over-month basis since July 2021 You're going to start hearing a theme here. Manufacturing, obviously, once again, jumping to 57 even. If you're looking at the manufacturing output, that also increased by 56.7 from 53.1. A lot of that demand is coming domestically, while exports are still looking subdued at this point in time. But both of those readings on the manufacturing front is the strongest readings since 2022

You're also looking at services, once again, you're seeing the services PMI hitting a record of a 59-month record at this point in time as well. All of this pretty much goes back to 2021 and 2022 when you're looking at the rate of change on a month-over-month basis or the nominal numbers themselves. That's why you are seeing a little bit of the concern. Prices or input prices continue to rise to the upside, and you are now starting to see a rise in backlog and capacity constraints, which is once again leading to fears that maybe a lot of these companies will start raising prices because of higher input costs, as well as some of these backlogs here, and they are starting to note some bottlenecks when it comes to the supply chain. So input costs actually surged to the fastest pace in four years as well as on the inflationary front. So you can make the case that, yes, this is why we are seeing the 10-year move in the fashion that it is. S&P Global PMI is really a second tier type of data set, but this morning obviously it's having a bigger impact. I just want to highlight this real quick.

There's more volume that's trading on the 10-year futures contract right now, Sam, for the initial reaction for this data set than what we saw for the Fed meeting and Morrish's comments. So that's kind of giving you some perspective as to how serious the market's taking this data set today.

SPEAKER_1 (2:38)

Yeah, absolutely. And it goes to show the resilience of the economy, but as you say, with those input costs jumping in September, the steepest rate in four years, as you say, it's not a data center that set, I should say, it typically moves the needle. But obviously, it seems to be a little bit of a worry with the concerns around what that could mean for raising prices, particularly with the input costs that we're seeing here. We did see a similar story as I set out in Europe last night as well, 41 month high for their PMIs too. So what's going on with oil? Because obviously, we've got this correlation between oil and the tenure at the moment.

Are we beyond the words and the rhetoric now and getting back to more of the macro? Is that what traders are focused on? Is it the supply gaps, the shortages and the sort of record high refining margins that's got oil higher today for us?

Kevin Green (3:32)

The couple of factors, we do know that a tanker was actually hit in the Strait of Hormuz. So that was actually a strike that's taking place at the same time that the UN meeting is happening. So that's once again, kind of pushing energy prices to the upside. We also got close to some key areas of support on the $89, $88 level is where several different moving averages are residing at this point in time. So some buyers stepped in. We had the API report yesterday evening that showed a little bit of a build up. We will have the EIA number coming out in about 24 minutes. Let's see if that actually confirms. And then also the markets kind of looking at the seriousness or the White House taking it serious that they could potentially ban diesel exports. Now, what's actually very interesting, we have WTI up about 1.5 or 1.25 percent right now, but you had also diesel down 2.4 percent. So the energy market is taking it serious that we could see an export ban in place, which once again will lower prices here domestically for a short period of time, but also could disrupt the global energy markets as a whole.