Daily Brief - A Manufacturing Uptick Unsettles Markets

TLDR: Despite the positive news indicating the country's first growth in the manufacturing sector since the fall of 2022, the market took a downturn.

The Institute for Supply Management (ISM) reported that its manufacturing gauge rose to 50.3 in March, marking an end to 16 consecutive months of contraction in manufacturing activity. This figure was better than the anticipated consensus of 48.3, as surveyed by the Wall Street Journal.

In March, four out of the six largest manufacturing sectors showed growth. These sectors include Food, Beverage & Tobacco Products; Fabricated Metal Products; Chemical Products; and Transportation Equipment, together comprising 54 percent of the total manufacturing GDP.

Bond yields responded to this growth with a significant surge, with the yield on a 10-year note reaching 4.318%. Similarly, the 2-year yield climbed to 4.707%, recovering losses experienced after March's Federal Reserve meeting where Chairman Jerome Powell announced a steadying of interest rates.

This rise in bond yields put substantial pressure on stocks because unlike China, where increased manufacturing activity signals positive growth as the economy seeks to recover, in the US, a surge in manufacturing activity indicates unwanted economic robustness - potentially leading the Federal Reserve to maintain higher interest rates for an extended period.

If the Fed decides to maintain higher rates for an extended period while seeking further clarity on inflation trends, this approach might increase the likelihood of a short and mild recession.

Market Movers: When the Manufacturing PMI crosses 50

Here are the historically best and worst performing US sectors on a 1-month horizon when manufacturing PMIs cross above 50, the 10Y jumps and the SPX falls on the same day:

The top 3 performing assets:

1. S&P Gold Miners with a return of 18.40%
2. S&P Banks Select Industry Index with a return of 13.93%
3. S&P Materials with a return of 7.43%

The bottom 3 performing assets:

1. S&P Biotech with a return of -8.21%
2. S&P Semi Select Industry Index with a return of -7.42%
3. S&P Software with a return of -4.73%

Bullish Asset Spotlight: State Street RSI at a high

In the last 7 occasions where State Street's RSI was at a recent high, analysis from Toggle indicates a median increase in the stock's price over the next 6 months.

State Street recently finalized its acquisition of CF Global Trading, aimed at broadening its outsourced trading services, especially in the UK and EU, complementing its presence in other regions.

Bearish Asset Spotlight: Toast realized volatility at a low

Analysis from Toggle suggests that in the last six instances when Toast experienced notably low volatility, there was a median drop in the stock's price over the following month.

Toast, Inc. is a cloud-based restaurant management software provider headquartered in Boston, Massachusetts. It offers an all-in-one point of sale (POS) system designed for restaurants and bars, leveraging the Android operating system.