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ISM PMI’s point to a mixed payrolls report

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The ISM’s manufacturing and non-manufacturing PMI’s, released earlier this week, suggest that while the activity in both the sectors has improved from a month ago, the employment sub-indexes painted a mixed picture.

The ISM’s manufacturing data showed that the employment index rose to 57.2, compared to 53.5 in May. But the non-manufacturing data of the employment index fell 2 points, to 55.8 in June. The data suggests that the pace of job growth could continue to remain subdued.

Analysts are expecting that the US economy added 175k jobs, compared to 138k jobs seen the month before. The focus will, of course, be on the average earnings which are forecasted to rise 0.3% on the month, up from 0.2% seen previously. The US unemployment rate is, however, expected to stay put at 4.3%.

ISM manufacturing rises in June to 57.8

ISM manufacturing PMI, June 2017: 57.8
ISM manufacturing PMI, June 2017: 57.8

Following a steady decline in manufacturing activity for nearly three months since March this year, the manufacturing activity as measured by the Institute of Supply Management (ISM) bounced back to 57.8 in June.

The ISM index for manufacturing activity surged past the previous high set this year in February when the index topped 57.7. Rising to 57.8 in June, this was the highest reading in the ISM index since August 2014.

The resurgence in the index brings back some optimism about the US manufacturing sector, signaling the health of the sector in the second half of the year.

The ISM’s manufacturing index showed a broad-based strength across the board. So far, the ISM’s index has been signaling expansion for nearly ten consecutive months.

Data showed that new orders index rose to 63.5 in June while the production index was registered at 62.4. The employment index also rose to 57.2 while new export orders increased to 59.5.

There was, however, some disappointment as the prices index fell to 55.0. This showed that there were slower growth costs for raw materials. In the ISM’s index, 15 out of the 18 industries that are tracked shown a contraction.

A number of factors are attributed to this including weaker oil prices, slower demand from overseas markets and a stronger dollar. Consumer prices have also softened in recent months validating the weaker cost of raw materials.

Following the ISM’s release, the US dollar index posted a strong recovery. This comes after the greenback is down nearly 6% in the first half of the year. Uncertainty on the political front alongside a slowdown in the US inflation and growth figures removed some of the optimism about the US dollar.

ISM services PMI beats estimates, rises to 57.4 in June

ISM non-manufacturing PMI, June 2017: 57.4
ISM non-manufacturing PMI, June 2017: 57.4

The non-manufacturing ISM PMI continued to perform better than the manufacturing PMI. Data showed that the services sector activity rose to 57.4 in June, compared to 56.9 in May. This was a second consecutive increase in the services PMI data, although still lower compared to February’s high of 57.6.

Economists were, in fact, expecting to see a decline in the services index. Most of the survey respondents remained positive on the outlook for the economy. Nearly 16 out of 17 industries reported growth suggesting that the services sector continued to remain strong, driving growth.

On Wednesday, the Fed’s meeting minutes shown that policymakers were a bit divided on the timing of shrinking the balance sheet. However, there was an overall consensus that policy tightening was the appropriate policy response. Some FOMC members were concerned that inflation could remain weak while others were concerned about inflation overshooting the Fed’s 2% target rate.

For the day ahead, the US nonfarm payrolls will be the main event of the day. Following the weaker than expected print from the ADP private payrolls yesterday, the markets could be expecting to see a soft payrolls report.

Of course, wage growth will be the important factor with the Fed staying confidence that wages will eventually push inflation higher.

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