US Close: Stocks are mixed, ISM highlights Supply chain and labor issues

Following a surprisingly strong October, US stocks are mixed as investors await the Fed’s taper announcement and latest assessment over inflation worries.  The Treasury is also expected to announce the reduction of quarterly sales of longer-term securities for the first time since 2016.  The US economy has been pumped up higher by what seemed to be never-ending stimulus, but that will change very soon.  A wave of central bank rate decisions this week will show tighter monetary policy stances from the RBA, Fed, BOE, and Czech central bank.  The global economic recovery is back on track, but how long will that remain as rising borrowing costs start to threaten the recovery.

US stocks have fully priced in the Biden administration getting infrastructure spending and the economic package done before the end of the year.  Stocks remained near session lows after Senator Manchin did not signal Democrats were any closer.  Manchin reiterated holding the infrastructure bill hostage won’t work and that he won’t support reconciliation without knowing more.     

ISM

The ISM survey painted a different picture that was more pessimistic than the regional surveys.  The headline decline was not as bad as expected, but the plunge in new orders and rise in prices paid will weigh on the short-term outlook.  Manufacturing activity has now been in expansion territory for 17 months with a headline reading of 60.8, a beat of the 60.5 consensus estimate.  The ugly part of the report was the big miss in new orders, declining to 66.7 to 59.8 and 4.4 points shy of the forecast.  The survey highlighted the obstacles (including the Imports Index moving into contraction territory) in meeting demand and the difficulty with labor turnover.   

Supply chain and labor issues will complicate the manufacturing recovery for the first half of next year.    

Central Banks

This is a busy week of policy decisions that mostly show central bankers are turning hawkish as inflation intensifies and removing support from their respective recoveries.  The RBA could tighten policy following Friday’s move in yields which did not prompt any action from the bank.  The two choices on the table for the RBA is to give up on yield curve control or raise rates.  The Fed has done a good job in setting market expectations for a taper announcement this week, the big question is whether after Powell’s press conference will rate expectations go up from one to two rate hikes.  The BOE rate decision is rather interesting as economists are anticipating no change in rates but financial markets are pricing in a 15 basis point increase.  The central bank of Norway (Norges) is expected to keep rates steady following their rate increase at the last meeting.  The Czech central bank (CNB) is expected to raise their Repurchase rate by at least 50 basis points. 

What is normally a period of strong appetite for equities will face a test of rising interest rates and growth concerns.  The outlook for US stocks is still higher, but given the outperformance in October, November might be choppy. 

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