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American production contracted. Here's what's next



Those who have claimed that the United States can withstand the weakness of global factories just got a shock: the US industrial sector shrunk last month, according to the Institute for Supply Management. It is the first time this has happened since August 2016.

Against expectations, the Group's production index, which was a key metric for the industry, reached 49.1 when the trade war sentiment. Any number below 50 indicates a contraction.

So what happens next? Societe Generale strategist Kit Juckes points out that this is the third time that US producer ISM has fallen below 50 since the financial crisis, and the previous two events did not trigger a recession. But it is definitely not a positive signal.

In the short term, the biggest impact of the surveys has been to raise expectations for a larger interest rate cut by the Federal Reserve later this month. The odds of a 50 basis point cut are now more than 9%, up from 0% on Tuesday, according to CME Group's FedWatch tool.

But we get a much better picture of what the Fed is working on by the end of the week. The Institute of Supply Management's non-producing index arrives on Thursday. This was of course followed by an August job report on Friday.

Investor insight: It is important to keep focus on production, especially given the international backdrop. The current slump in global industry extended to its fourth month in August, according to JPMorgan's Global Manufacturing PMI, based on surveys with thousands of executives in over 40 countries.

But the industry operates around 1

1% of US economic output. Should it become clear that the downturn in the factory is bleeding into the service sector, it will pack a bigger drag – especially because of what it will mean for jobs. Look at this room.

Hong Kong shares hover

Hang Seng ( HSI ) had just its best day of the year hoping for protests in the city to fade away.
  Hong Kong shares gain almost 4% on best day of the year

Happening now: Hong Kong leader Carrie Lam announced the complete withdrawal of an extradition law that had sparked months of pro-democracy protests in the city streets. The news pushed Hong Kong's main index by 3.9% on Wednesday, according to my CNN Business colleague Laura He.

The consequence, per Laura: "Almost all components of Hang Seng were up [on the news]. The biggest winners were all property developers, which have been beaten by protests and the ongoing US-China trade war."

Big picture: Last month, Hang Seng recorded a 7.4% drop, one of the worst among the big indices. The protests have created a dangerous environment for companies operating in Asia's foremost economic hub. Any sign that tensions can ease should encourage investors.

Boris Johnson's loss is the pound gain

The pound is whipped by political turmoil in the United Kingdom. Brace for more volatility as the parliamentary drama continues to unfold.
The currency jumped 0.9% against the dollar on Wednesday, rising to nearly $ 1.22 after Britain's Prime Minister Boris Johnson led a parliamentary uprising aimed at preventing Britain from crashing out of the European Union without an agreement to protect the economy. These gains reverse steep declines from earlier this week when the pound fell to its lowest level since a surprising flash crash in October 2016.

On the radar: Investors are now looking at the prospect of a choice, which could theoretically be called before or after Brexit deadline October 31st.

Some investors worry that a choice would only enhance the chaos. The outcome could strengthen Johnson to continue his hard-line approach to Brexit. Or it could lift Labor leader Jeremy Corbyn, whose leftist politics may hit asset prices, the mindset thinks.

Deutsche Bank strategist Oliver Harvey disagrees. He says an election is the "worst of all scenarios this week" and believes it will reduce the prospects of no Brexit deal. Harvey says he would upgrade the view of sterling to neutral if called for an election in October.

Key takeaway: Labor policy would be temporary, reversible and most likely moderated by parliament, as opposed to the "permanent shock caused by a no deal Brexit," per Harvey.

Up Next

American Eagle Outfitters ( AEO ) reports on revenue before US markets open. Slack ( WORK ) will follow the end.

Also today:

  • US trade balance for July arrives at 08:30 ET. [19659029] The Bank of Canada will issue its latest interest rate decision at 10 PM ET.

Coming tomorrow: Time for the Institute of Supply Management & # 39; s Non-Manufacturing Index. Follow this one.


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