ISM manufacturing PMI fell to 21-month low of 46.3 in March

By Geoffrey Smith 

Investing.com -- The U.S. manufacturing sector sank deeper into contraction in March, according to a closely watched business survey published on Monday.

The Institute of Supply Management's manufacturing purchasing managers index fell to a 21-month low of 46.3 from 47.7 in February, well below consensus forecasts for a more modest drop to 47.5. An index level of 50 typically separates growth from contraction, and the ISM's index has now been below that level for five months, having fallen steadily over the last year.

All three of the sub-indices in the report - for employment, new orders, and prices paid - also turned out below 50. Order backlogs and lead times also declined, painting a picture of a sector that is cooling rapidly under the pressure of repeated hikes in interest rates over the last 12 months by the Federal Reserve.

U.S. stock futures shot higher on the news, while the dollar weakened and bond yields fell, as market participants bet that the slowdown implicit in the ISM numbers will force an early pause to the Federal Reserve's policy tightening cycle.

ISM chair Timothy Fiore said factories were aligning themselves for a weak first half before a possible rebound later in the year.

He noted though that there was only “mixed sentiment about the return of growth early in the second half.”

One response from the transportation equipment sector (which includes automaking) noted that: "Sales are slowing at an increasing rate, which is allowing us to burn through back orders at a faster-than-expected pace,” while another response from the machinery sector highlighted especially weak demand from the automotive sector. 

By 10:15 ET (14:15 GMT), the S&P 500 futures contract was up 0.4% at its highest since mid-February, while the dollar index, which tracks a basket of developed economy currencies against the greenback, was down 0.4% at 101.775. The yield on the benchmark 2-year Treasury note, briefly fell back below 4%, before bouncing a little to trade at 4.03% down 13 basis points from Friday's close.

The drop indirectly corroborates the surprise move over the weekend by the Organization of Petroleum Exporting Countries to cut oil output, in response to signs of weakening demand from advanced economies. OPEC had said its members will cut over 1 million barrels a day of output from May.