Although the manufacturing ISM index came in above the consensus, as we had expected, it was below our own projection. The June figure of 50.9 was higher than the Street's 50.5 estimate, and below our 51.6.
This bounce was not surprising given the very disappointing results of the previous month. New orders, production, and inventories sub-indexes are now above 50.0, indicating some growth. However, the customers' inventories sub-index contracted further to 45.0 (from 46.0), indicating that customers are not very optimistic regarding future demand. In addition, it validates the thought that inventory replenishment on the manufacturers' side is not driven by growth in demand, but by lack of inventory replenishment in prior months. This is supported by the further decline in backlog of orders.
The employment sub-index and its 2.8% decline (48.7 from 50.1) certainly stood out for us in this report. Although manufacturing jobs are no longer a big chunk of total jobs in the US, the fact that this survey shows job losses, as opposed to decline in job growth, is alarming. We think it provides some support for what we posted regarding this Friday's upcoming BLS employment report: we expect a miss. We will see if this can be backed up by the ADP report and the employment sub-index of non-manufacturing ISM; both reports will be released on Wednesday. As a reminder, we expect a +125K change in NFP for June, lower than the Street's 161K estimate. The BLS employment report will be released on Friday.
It appears that the equity market is embracing the disappointing employment sub-index figure today, as the S&P 500 is up more than 1%. As mentioned before, these days (well, the last few years), bad news is good news because it verifies that the Fed's QE policy will continue, even though the economic benefits from QE have come in far short of expectations. The artificial inflation of financial assets, with the never-ending hope of some 'trickle-down' effect, continues.
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