Tuesday, June 4, 2013

Disappointing May '13 Manufacturing-ISM

Manufacturing ISM for the month of May came in below expectations.  The index value of 49.0 was bad news, bad economic news and not necessarily bad equity market news.  First, that figure was not only below the Street's 51.0, but also below our 50.4 projection.  Second, anything below 50.0 indicates lack of growth.  We are not saying slower growth; we are saying no growth, actual contraction.  The only sub-indexes above 50.0 were employment, exports and imports.  We must say that all of those sub-indexes did decline from the prior month.  

Let's look at it this way: new orders, backlog of orders, production, and deliveries all plummeted to below 49.0; while employment remained above 50.0 (at 50.1 and lower than April's 50.2), inventories went up to 49.0, exports declined to 51.0 (from 54.0), and imports, although 0.5 below last month's, remained high at 54.5 (comparatively speaking, of course).  We think this is bad news as it indicates lower current and future demand, higher costs (especially on the HR front), and a good chance of inventory build-up the next couple of months.  

Of course such bad economic news is good news for the equity market as long as the Fed keeps the market 'high'.  Many hope that bad economic news will push a Fed exit strategy further out, meaning that its QE strategies will continue going into maybe the next decade, or generation, or century.  

S&P 500 responded kindly to such bad economic news by closing up nearly 0.6%.  As long as such policies force many to 'invest' in riskier assets, such as equities, and as long as the value of those assets continue to get inflated (ignoring lack of income or wage growth), then everyone and everything is fine.  Well, of course that is not true, but maybe we can say: as long everyone thinks everything is fine, then everything is fine.  

Again, non-manufacturing ISM and ADP will come out on Wednesday (6/5), initial jobless claims on Thursday (6/6), and May's employment report on Friday (6/7).  On the employment front, our estimate is not even close to the Street's 167K.  We are expecting only a 95K increase in NFP for May.  Wednesday's ADP report will indicate if our NFP projection is a wacko one or not.  Let's hope the employment report will not disappoint, because the market could behave as it did last Friday (or even worse) after even just a slight miss.

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