Summary:
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US ISM manufacturing hits highest since 2004
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Growing divergence with both the PMI reading and European equivalent
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USD adds to gains; Stocks attempt to recover
The biggest data point of the day from the US has come in well above forecast, boosting further an already buoyant buck and seeing stocks recover from their lowest levels of the day. To be specific the ISM manufacturing index for August rose to 61.3 from 58.1 last time out, well above the 57.6 expected and actually the highest reading since 2004. Two of the standout contributors to the rise were new orders and production which came in at 65.1 (vs 60.2 prior) and 63.6 (vs 58.5 prior).
The most recent ISM release was far better than expected and in fact the highest since 2004. Source: Bloomberg.
While the data itself is no doubt pleasing, there are a couple of things to bear in mind which could be seen to question the strength of the data. First and foremost the latest ISM reading was well above the equivalent PMI release, which came in at 54.7 for the same period. Far from hitting a 14-year high, the PMI number actually dropped to its lowest level of the year and this marked divergence is a clear contradiction. This is concerning for those wanting to draw a strong conclusion on the overall health of the manufacturing sector as the two leading surveys are telling different stories.
The most recent ISM rose to a 14-year high but the PMI release for the same month fell to its lowest level of the year. This has created a large divergence between the two metrics that have historically exhibited a strong positive correlation. Source: XTB Macrobond
The second point is that the rise in the ISM has also seen a record spread between itself and the European equivalent - the Markit Eurozone manufacturing PMI. Similar to the ISM and PMI divergence this paints a mixed picture given that these two have also exhibited a fairly strong positive correlation. Source: BLoomberg
The US dollar has been bid all day and it has continued higher since the release with the EURUSD dropping below the 1.1550 level to hit a 2-week low. Stocks have come under pressure today with emerging market (EM) concerns weighing on developed markets also. Further strength in the US dollar will likely impart more pain for EM currencies and while the US500 has jumped higher following the ISM release it could be short-lived joy if the EM concerns continue to grow. Looking further ahead the first Wall Street forecast for 2019 on the S&P500 (US500 on xStation) has been released this afternoon. Credit Suisse equity strategist Jonathan Golub has predicted a 3,350 point target for the end of next year - some 15% above present levels - citing solid economic/EPS growth and benign recessionary risks as being sufficient to propel the market higher.
The US500 had dropped below prior lows around 2894 shortly after the Wall Street open, but the market has looked to recover since the strong ISM release. Source: xStation
