It was pretty widely expected that the ISM Manufacturing report for the month of October was going to show a slower rate of growth, and that’s exactly what we saw.  While economists were forecasting the headline index to drop to 59.0 from last month’s reading of 59.8, the actual reading was much weaker at 57.7.  That is the lowest reading for the headline index since April, and it was tied for the largest m/m decline since August 2016.  Despite the decline and weaker than expected reading, the manufacturing sector is still expanding, but the rate of growth has slowed.

The table below breaks down this month’s report by each of the report’s subcomponents and shows their m/m and y/y changes.  On a m/m and y/y basis, most components were down, but the disparity wasn’t all that wide.  The only component that is in contraction mode is Customer Inventories, but it has been in the sub-50 range for quite some time now.

Heading into Friday’s Non-Farm Payrolls report, we wanted to highlight the employment component of this month’s ISM report.  As shown above and in the chart below, October saw a two-point decline in the index putting in what is the second lower high since the peak last October.  Again, the level of 56.8 still implies growth in employment for the manufacturing sector, just at a slower pace than last month and last year.

Finally, with respect to the commentary section of this month’s report, we wanted to highlight two trends that stand out: inflation and slower activity.  The yellow highlights below indicate comments related to higher costs or upward pricing pressures (there’s a lot of them!), while the purple highlights commentary from the Machinery and Fabricated Metals sectors indicating a potential slowdown in the pace of business activity.

Last week on the backs of negative price action, bullish sentiment fell sharply to the fourth lowest reading this year.  According to the weekly survey from AAII, there has been quite the turn around this week as bullish sentiment jumped from just under 28% all the way up to 37.9%.  This is actually just above the average of the year and an impressive improvement in a short span of time.  If the rally from the last two days of October continues throughout the week, we should expect to see bullish sentiment increase once again next week.

Conversely, the bearish camp shrunk this week to 34.5%.  While this is lower than last week, it is still at fairly elevated levels compared to most of the year and is about in line with readings from early October.

Neutral sentiment fell to its lowest since February 1st of this year.  Investors seem to be increasingly taking sides with most leaving the bearish camp for the bulls.

Jobless claims saw only a slight decline last week falling from 216K down to 214K, which was just a tad above consensus expectations for a decline to 212K.  While claims have increased 12K from their low print in mid-September, they have now been at or below 300K for a record 191 straight weeks, at or below 250K for 56 straight weeks, and at or below 225K for 17 straight weeks.  They may have stopped falling, but they are still extremely low.

The four-week moving average also edged higher this week, rising from 212K up to 213.75K.  That’s 6.75K above the cycle low of 206K from mid-September, and given recent trends, we wouldn’t expect this indicator to make a new low anytime soon.

On a non-seasonally adjusted (NSA) basis, jobless claims dropped to 197.5K.  For the current week of the year, this is the lowest weekly reading since 1969.  It is also close to 125K below the average for the current week of the year dating back to 2000.

Below is our asset class performance matrix highlighting the total return of various ETFs across asset classes during the month of October.  We also include YTD total return as well as the percentage change over the final two trading days of October.

While the last two days of October were extremely strong for equities, major US index ETFs still finished October down 5-10% across the board.  The most pain was felt in smallcaps which still fell 10%+ on the month even after 2% gains over the last two days.  Looking at sectors, Consumer Discretionary, Industrials, and Energy were all down 10%+ in October, while Utilities and Consumer Staples actually finished up 2%.

Outside of the US, Brazil was the big winner with an October gain of 19.03%, while Mexico was the big loser with a decline of 17.86%.  While China was down 8% on the month, it saw a massive gain of 4.4% over the month’s final two trading days.

Commodities overall were down in October, but both natural gas and gold were up on the month.  Fixed income ETFs were down in October as well.

The EIA updated their weekly data for petroleum products this morning.  Crude inventories rose to 426 million barrels this week, up 1.68 million from last week.  While far from the highs of the past five years, this is only slightly above the five-year average for inventory levels.  These numbers are in line with seasonal trends; oil inventories typically rise as refineries re-tool for winter product blends.

Strong demand from abroad paired with higher production has brought crude exports to their second-lowest deficit in the past five years.  The smallest deficit actually came from earlier this month (10/5).  Throughout this year, the deficit in crude exports has maintained a very low level relative to the last couple of decades.

As shoulder season comes to a close, refinery demand has started moving back to more normal levels. Refinery throughput has been at elevated levels for most of the year, and is still high relative to the past five years, but is much closer to the average than where it has been.