Among the bad news this morning was disappointing economic data in the form of the New York Fed’s Empire Manufacturing report.   The report was expected to remain in contraction falling to -7.9 versus a reading of -5.8 last month.  Instead, the index plummeted to a much weaker reading of -24.6.  Although that is not a new low with even weaker readings as recently as January and last August, the report indicated a significant deterioration in the region’s manufacturing sector, and whereas weather in January was an easy scapegoat for the weakness, that’s not the case for the March report.

Given the large drop in the headline number, breath was equally bad with many other significant declines.  Like the headline number’s 5th percentile reading and month-over-month decline, New Orders and Shipments both saw double-digit declines into bottom decile readings.  In the case of Shipments, that low reading comes after an expansionary reading last month. Inventories was the only other current conditions index to move from expansion to contraction leaving Prices Paid and Prices Received as the last expansionary categories.

As mentioned above, demand appears weak as New Orders and Shipments are the two most depressed categories from a historical perspective with each index coming in the bottom 3% of all months since the start of the survey in the early 2000s.  Six-month expectations are equally low.  Unfilled Orders were one of two categories to see a higher reading month over month with the 2.5 point increase much smaller than the move in expectations.  Unfilled Orders expectations surged by 12.1 points, ranking in the 95th percentile of all monthly moves on record.  That would indicate the region’s firms expect unfilled orders to rise at a rapid pace in the months ahead, likely as a result of weakened sales. That does not mean the area’s firms are expecting inventory build-ups, though.  Inventory expectations saw a modest 1.4-point increase month over month in March, but that remains one of the lower readings of the past decade.

The only other current conditions index to move higher month over month was delivery times.  Even though it moved higher, the index continues to indicate lead times are rapidly improving and expectations are calling for those improvements to continue.

Next to the dampened demand picture, employment metrics were perhaps the next most jarringly negative.  Hiring is falling precipitously with the Number of Employees index hitting a new cycle low of -10.1.  Average Workweek also is reaching new lows. At -18.5 it has only been as low during the spring of 2020 and during 2008 and 2009. Click here to learn more about Bespoke’s premium stock market research service.

shy /SHī/ – adjective 1. being reserved or having or showing nervousness or timidity in the company of other people.

When one thinks about short-term US Treasuries and their traditional day-to-day price action, shy is a pretty good description.  Traditionally, short-term Treasuries have not been the place an investor who was looking for action would go to look.  That’s what tech stocks are for!  As the Fed has embarked on what has been the most rapid pace of rate hikes in at least 40 years, though, no type of financial asset, including short-term Treasuries, has been spared.  The chart below shows the iShares 1-3 Year Treasury Bond ETF (with the aptly named ticker SHY) over the last year. A year ago, the ETF was trading just above $84, and last week it was down near $80 before rebounding over the past few days to a high of $82.02 yesterday.  A one-year range of just under 5% is hardly volatile, but from the perspective of a short-term Treasury investor, it’s a gigantic move.

The last week has been a period of historic volatility for US Treasuries – at least relative to the last 20 years.  The chart below shows the daily percentage changes in SHY since its inception in July 2002.  Yesterday, the ETF had its largest-ever one-day gain at just under 1% (0.997%).  You can also see from the chart that ever since the FOMC started hiking rates in early 2022, the magnitude of SHY’s average daily moves has rapidly expanded.

Monday’s (3/13) nearly 1% rally in SHY also marked a milestone for the ETF in that it experienced a one-day gain or loss of at least 0.25% for three consecutive trading days.  That tied the longest-ever streak of 0.25% daily moves from back in September 2008 just after Lehman declared bankruptcy.  With SHY down 0.34% on the day in late trading Tuesday, it is now on pace for its 4th straight day of 0.25% daily moves. Yup, you read that correctly; volatility in short-term Treasuries is greater now than it was during the Financial crisis!  When Powell said last Summer that fighting inflation would ‘bring some pain’, he wasn’t kidding.  As a result, SHY may want to consider changing its ticker to something more applicable.  “BOLD” is available.  Click here to learn more about Bespoke All Access, our premium membership offering.

Early this morning, the NFIB released the results of its February survey of small business optimism. The headline index rose to 90.9 versus expectations of it remaining unchanged at 90.3.  In spite of the bounce, small businesses continue to report some of the worst sentiment of the past decade with the February reading right back in line with the April 2020 low.

Diving deeper into the categories of the report, breadth was mixed.  Of the ten inputs into the headline number, four were lower month over month, one was unchanged, and the other half were higher.  For the most part, these indices also remain in the bottom decile of their historical readings.

In today’s Morning Lineup, we highlighted how the report’s labor metrics have been improving in each of the past four months on an aggregate basis.  Plans to increase employment remain healthy in the 77th percentile while the percentage of respondents reporting job openings as hard to fill hit a new record high after rising by a near record 9 points month over month.  Although openings were harder to fill, firms also took on more workers.  With actual employment changes moving up to 4, it hit the highest level of the post-pandemic period.  However, that did clash with hiring plans falling 2 points to match December for one of the lowest readings of the past few years. Likewise, plans to increase compensation are at the lower end of their recent range even while actual observed changes to compensation have improved in the past few months.

The same dynamic in which plans are headed in the opposite direction of actual changes can be observed with regards to capital expenditures.  Capital expenditure plans were unchanged at 21 last month for the joint lowest reading since March 2021.  Meanwhile, actual capital expenditures rose to 60, the highest since March 2020 and credit conditions have improved. Turning to inventories, satisfaction (meaning the net percent of firms reporting if inventories are too low versus too high) fell to the lowest since the spring of 2020. As a result, a net 7% of firms are reporting that they plan to decrease inventories in the coming months.

Finally, we would note that on net more firms are seeing lower rather than higher sales in spite of improvements to inflation metrics.  The outlook for general business conditions has yet to see any improvement as few businesses report now is a good time to expand.

Most firms report now as a poor time to expand due to economic conditions at 36% of responses.  The next most commonly credited reason is political climate followed by interest rates, which at 7% match the December reading for the highest since at least 2020.    Click here to learn more about Bespoke’s premium stock market research service.

At its YTD high back on February 7th, the S&P Financial sector ETF (XLF) was up more than 8% on the year.  Since that high, the sector has fallen more than 13% and is now down more than 6% YTD.

With systemic risk in the Financial system making front-page headlines again, we checked in on the sector’s weighting in the S&P 500 to see how it compares to where things stood back in the mid-2000s ahead of the Financial Crisis.  Below is a look at the Financial sector’s weighting in the S&P going back to 1990.  As of this writing, the Financial sector has a weighting of 10.73% in the S&P.  That’s down a full percentage point from where it was at the end of February.

What’s interesting to note is how much smaller the sector is today compared to its weighting back in early 2006 when we were on the cusp of the Financial Crisis.  At its peak in early 2006, the sector’s weight in the S&P had ballooned to 22.4%, which made it the largest sector of the S&P at the time.  When the Financial sector, which is a sector meant to service the rest of the economy becomes the largest sector, something’s off!  Of course, the Financial Crisis following the bursting of the housing bubble of the mid-2000s corrected this problem, as the Financial sector’s weighting fell from north of 22% down to south of 9% when the bottom was finally put in back in early 2009.  During this latest bout of issues for Financials, the sector is still big enough to be the third largest sector in the S&P behind Tech and Health Care, but it’s not nearly as “weighty” as it was before the Financial Crisis, and its weighting has actually been trending lower for the last 7-8 years. Click here to learn more about Bespoke’s premium stock market research service.