August 2, 2021
ISM deceleration to 59.5 from 60.6 last month is relatively meaningless and partially reflects ongoing bottleneck pressures. The goods sector has been held back by what looks like a massive inventory drawdown (largest in decades) during Q2. Better June Industrial Production numbers from Japan and Korea may have been the first indication of easing bottleneck pressures and an accelerated inventory restocking in the second half. PMI/ISM data north of ~55 still points to rapid expansion. The delta variant remains a key risk to the global growth outlook, but we maintain our stronger second half view as Europe accelerates. Friday’s July Jobs Report is the next significant catalyst with consensus looking for +813,000 payrolls and a 5.7% Unemployment Rate (down from 5.9% last month).
Bond yields: Treasury prices are now in extreme overbought territory as yields reflect late cycle dynamics, despite early cycle growth fundamentals. Watch for a bearish reversal in the days ahead with acceleration once 10-year yields cross back through the 200-day moving average of ~1.28%.