The US manufacturing ISM index was outright weak with the headline falling to 51.1, from 52.7, so much weaker than expected. New orders plunged to 51.7, from 56.5. Employment was lower as well and the customer inventories index jumped to 53.0, from 44.0. Both our short-term ISM model and the 'new orders - customer inventories' differential suggest a lower ISM over coming months, possibly dipping to around 50.
The new export orders index is also down to a very low 46.5, which is the weakest since July 2012, when the euro crisis was at its peak. At that time, the decline in the export order index was not mirrored in actual export data, suggesting that some of the weakness reflected sentiment effects. This could be the case this time as well but developments in China are key to the outcome.
As argued in the US section of Weekly Focus: China and oil prices are key in the short term, 28 August, we are not surprised to see a decline in the ISM. In general, US economic data has been solid over the past two months but several factors could slow growth rates in manufacturing industry over coming months. In particular, data shows a significant inventory build-up in both the manufacturing and retail sectors in Q2. While demand continues to look solid and the fall in energy prices should boost private consumption, we believe an inventory correction is due. Coupled with the negative impact of a stronger USD and general increase in uncertainty, manufacturing production and the ISM manufacturing index could weaken further short term.
We believe that today's data moved the probability of a fed funds rate hike in September down markedly and we stick to our call that the Fed will deliver a first rate hike in December.
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