Let’s see. Manufacturing in the world’s biggest economy ground to a halt in January. The benchmark treasury yields is at its lowest in three months and stock indices can’t hold onto earlier signs of a rally. So then that likely puts the CBOE volatility index at a sky high reading of 20.0. Indeed the Vix index earlier traded to as high as 20.27 in response to investors dumping stocks sending the so-called “fear gauge” to beyond that 20.0 level where it rarely steps unless investors are really in panic mode. Ahead of lunchtime the mood has hardly calmed with the Vix last trading at 20.10 and as investors attempt to figure out whether or not the weather was the culprit. Certainly the Purchasing Managers Institute said some of the blame lay at the door of freezing temperatures and heavy snow across the nation – but that was probably not the entire reason. Certainly, it said, the reading was lousy – a blip on the radar screen – and there was cause for optimism later in the year. But investors are hardly in the mood to hang about and see. The S&P 500 index is lower by 17.6 points as the 10-year treasury yield slides to 1.62%. And notably there appears to be reasonable activity at Vix option strikes in both March and April up to the 24.0 and 25.0 strike prices.
Chart – US Manufacturing Slows
While new export and import orders fell marginally, they did not fall that much. That’s encouraging news for both domestic activity ahead and as a snapshot of the rebound gripping the Eurozone. However, the separate new orders component was terrible, sliding by 13.2 points to 51.2 and so barely expanding. The production gauge also had a rough ride as plants responded to the weather and its impact on activity around the nation. In both cases the index reading plummeted from its steady six-month moving average, which tends to argue that economists simply didn’t see a slowdown on the horizon, or as we like to believe, the weather-related impact was more shocking that anyone had felt it would be. And when you look at the consensus outcome for automakers in today’s slew of data, you can tell that this really is likely to prove a blip on the radar. But as for market nerves, the latest batch of data does not bode well for Friday’s employment report, which means investors may yet anticipate further volatility ahead of its release. In fact the only silver lining we can envisage is that the prior month might just be revised higher given it was at such odds with the ADP reading of private payrolls. At this point, that’s just a silver lining that many investors are unlikely to take a chance on. That may mean that the volatility index might even spend several days acclimating to the region above 20.0.