Thursday, November 1, 2012

Oct. ISM Mfg & ADP Beat Expectations; Adjustment to Our NFP Estimate

ISM Mfg (October)
October ISM for manufacturing of 51.7 was above our expectation of 50.0 and slightly higher than the Street's 51.5.  While this figure came in above expectations, it certainly does not indicate much of an uptick in manufacturing activity. 
New orders and production sub-indexes improved.  However, the employment index fell. 
In addition, inventories continued to decline, but some replenishment could follow in November, given increase in new orders.  Increase in inventories in Nov. will likely be subdued given the decline in Oct. backlog of orders sub-index.  We note that both exports and imports fell in Oct.
State of Employment Data & Estimate Revision
Two employment indicators, of which the results were mixed, were also released earlier this morning.  The Challenger job-cut report for Oct. increased to more than 47K, which is the highest level since May and is not necessarily good news.  The ADP employment report came in slightly better than the Street's estimate; 158K vs. the Street's 155K. 
In addition, ADP changed its methodology and is now working with Moody's to provide its estimate of monthly changes in non-farm private payrolls nationwide.  With this new information and the ADP Oct. report, we revised our model which generated a new and higher estimate of change in Oct. NFP.  We now expect that figure to be 110K (significantly higher than our initial projection of 75K), still below the Street's 125K expectations and slightly below last month's 114K.  That number will be announced tomorrow morning by the BLS. 
Market Update
After declining more than 3%, or 45 points, in two weeks, the S&P 500 is welcoming the latest slightly better than expected economic news.  Those numbers are having more of an impact than usual, given the damage and destruction that the hurricane and storm Sandy delivered to the Northeast the last few days.  S&P 500 is up 14.5, or more than 1.0%.  VIX is down 7.1%. 
Given that there must be some rebuilding after destruction, the XHB ETF is up 2.7% this morning and has increased approx. 5.0% since last Friday.  XLY, the consumer discretionary ETF, is also up more than 1.0% today.  We note that while preparation for the storm Sandy drove many to purchase more consumer staples products than usual, those purchases, along with rebuilding costs (in dollar and psychological terms), will likely reduce purchases of consumer cyclical or discretionary products and luxury items during the Holidays.  The XLY ETF could be getting ahead of itself as the Y/Y consumer cyclical purchases during Holiday season may not look that impressive.

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