Mid-Market Update: Prepare for March Mayhem, ISM data sends 10-year tentatively to 4%, Stocks tumble as Fed signal higher rates, China’s robust PMIs, Hot German inflation, AUD GDP, Oil volatile post US data and EIA report, Gold pares gains as yields surge, Bitcoin remains trapped

US stocks are falling after the ISM manufacturing report posted a modest rise that still remains in contraction territory, but prices paid came in hotter, which signals rising costs are coming. The argument for more rate hikes is elevated as material costs appear poised to rise and as the Fed has yet to see a true demand slowdown. March Mayhem could see tremendous volatility once we get a look at the February labor market report and possible downward January revisions. The February inflation report is also expected to show modest decline, but any hot pricing data could keep the bond market selloff going.   

US data

The February ISM Manufacturing report has a lot to unpack.  The key PMI reading snapped a streak of five declines and rose from 47.4 to 47.7, a miss of the 48.0 consensus estimate. Prices paid surged from 44.5 to 51.3, higher than the 46.5 forecast as demand clearly bounces back.  This was the first time since September that prices paid were above the key 50 level. 

When you consider that China’s activity impressed that should provide some support for the US readings over the next few reports.  New orders rose from 42.5 to 47, while production dipped from 47.3 to 48.0.  Employment fell into contraction at 49.1, while both exports and imports increased. 

It was a mixed ISM report but not a bad one as many respondents were upbeat on bookings and orders, but clearly concerned of a slowing economy. 

Fed

Fed’s Bostic is sticking to the script and supporting the case for ongoing interest rate hikes. He said, “I think we will need to raise the federal funds rate to between 5% and 5.25% and leave it there until well into 2024.” The Fed fund futures are now pricing in a peak rate at 5.50%, but if disinflation trends don’t provide clear signs of returning, calls for 6.00% might grow.

Asia

Global stock market turmoil might not be here to stay. Both China stocks and the yuan rallied after China PMIs show the economy is making a strong comeback. This round of data was very impressive.  China’s February Manufacturing PMI rose to 52.6, the highest levels since April 2012, crushing the 50.6 estimate. Non-Manufacturing (Services) PMI impressed with a 56.3 reading, above the 54.9 consensus estimate. 

Chinese stocks might get a boost as earnings season heats up, with many companies having improving outlooks.  The Chinese yuan initially rallied after the impressive PMI data. 

Aussie

The Australian dollar tumbled to a two-month low after Q4 GDP unexpectedly slowed and prompted some traders to downgrade their half-point rate rise bets to only a quarter point rise for the March 7th meeting. The Aussie-dollar turned positive after China’s strong data but drifted lower after the US data supported the Fed’s argument for a peak rate well above 5.00%. 

Germany

The ECB can’t be happy with this hot German inflation report.  The preliminary February German inflation reading rose to 9.3% from a year ago, analysts were expecting prices to cool from 9.2% to 9.0%.  German rates are surging as bond bears help send the 10-year yield to a 12-year high.  The 2-year German bond yield rose 6.5 bps to 3.184%.  ECB hawks won some vindication here and rate hike bets are rising. 

Oil

Crude prices went on a rollercoaster ride after mostly improving US economic data, a small headline draw with stockpiles, and as recession risk grows as Fed swaps keep rising.  The demand outlook might be improving, but the odds that the Fed will have to do more tightening that will send the economy into a mild recession are growing. 

The news flow was plentiful for energy traders.  Overnight, China’s impressive PMI data supported the case that their demand outlook will continue to improve.  German inflation raised worries that the ECB will have to be more aggressive with its tightening cycle.  The US data shows the economy is still slowing down but some parts are improving. 

Saudi Aramco CEO noted that they are seeing very strong demand from China and excellent oil in demand from the US and Europe. 

Oil looks like it will stay stuck in a trading range, but the risk are clearly to the upside. Some traders might be waiting until we get a better sense of what will be the peak rate after next Friday’s nonfarm payroll report. 

Gold

Something interesting is happening in the gold market.  Treasury yields surged, the 10-year yield even tested above 4.00%, but gold didn’t break.  Bullion traders appear to be growing confident that they have priced in peak Fed tightening.  A lot of uncertainty remains going forward, but it appears the king dollar rebound might not be as big as some traders were initially thinking. 

Gold has defended $1800 and now the question is can rally towards the $1878 level. 

Bitcoin

Bitcoin is higher on the day but remains constrained to its tight trading range.  Investors are growing less concerned over the regulatory risks and focusing more so on the improving demand that emerged in February. Bitcoin looks like it might stay in its $21,000 to $25,500 range a while longer.   

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Ed Moya

Ed Moya

Contributing Author at OANDA
With more than 20 years’ trading experience, Ed Moya was a Senior Market Analyst with OANDA for the Americas from November 2018 to November 2023. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Prior to OANDA he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business, cheddar news, and CoinDesk TV. His views are trusted by the world’s most respected global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Seeking Alpha, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.