Greetings from Copenhagen. 

Risk sentiment souring from the morning as the cocktail of a weak Chinese PMI and OECD revising the USD growth outlook down, while the Japanese 10y auction looked relatively strong, spilling over to global bond yields. However, it’s worth remembering that the 10y point has not been the primary cause of concern and has actually looked relatively stable bid-to-cover wise for a while, meaning that markets should probably care more about the 30y auction Thursday – where bid-to-cover ratios have been looking less appealing from a bond-bull’s perspective.

The ISM Manufacturing report yesterday provided food for growth doomers and stagflationistas with prices paid up, activity down, with export and import volumes printing at multi-year lows, despite forward-looking business cycle indicators suggesting that the activity slump has bottomed out. 

The import/export orders all over headlines (and the Chinese PMI this morning) was obviously “old” news given that high-frequency container shipping data has already shown the stop / lack of rebound in US trade flows from both China, but now also Germany, France and other European counterparts. 

Thus, while the survey was broadly weak on headline indices, the important part was rather that new orders rebounded slightly while inventories dropped from frontloading highs, implying that activity is rebounding relative to consensus rather than slowing. Obviously, this might be at lower margins in the future as businesses will have to reload inventories at higher prices if trade is not made / tariffs are deemed illegal.

Chart 1a: Manufacturing has likely bottomed out