Update Issued: 8/3/2017 10:14 AM
Both of the ISM reports are among the few top tier economic events that serve as runners up to the mighty nonfarm payrolls in terms of market moving ability. That said, any report that doesn’t focus on inflation has been de-clawed to some extent by the Fed’s current hyperfocus on inflation. In other words, jobs and growth don’t matter as much if they’re not having an effect on inflation.
This means ISM data would have to miss the mark by more than an average amount to have a traditional amount of impact. It would also have to have a weaker “prices paid” component (the only part of the report that speaks to inflation) to deliver full benefit to bond markets. Here’s how the numbers came out:
Bonds rallied initially on the much weaker headline, but the stronger “prices paid” component gave the rally some pause. Ultimately, it will be inflation data that best enables the Fed to hike more and taper more of its reinvestments. In that sense, the “prices paid” component of today’s ISM data offers a compelling enough reason for bonds to push back against the clear implications of the headline (i.e. the headline is telling bonds to rally, but the prices component says “not so fast”).
10yr yields are just a hair lower than pre-data levels at 2.244–still toeing that magical line in the sand at the lower end of the recent range. Fannie 3.5 MBS are up an eighth of a point at 103-06 (103.188). All in all, it’s been a modestly positive response to a headline that–a year ago–would have easily resulted in the day’s best levels.