ISM Employment Components Point To Strong NFPs

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ISM Non Manufacturing Biggest Monthly Increase On Record

Having fallen back to 51.4 in August, a level which has historically signalled a forthcoming recession, the ISM Non- Manufacturing Index recovered in September to print 57.1 – marking the best level in almost a year and the highest month on month increase in the survey’s history.

US ISM Non Manufacturing Index
US ISM Non Manufacturing Index

A further positive sign was the recovery across all activity gauges. New orders and production measures increased by over 8 points whilst the employment barometer rose by nearly 7 points from 50.2 to 57.2 – the highest level since October 2015. The employment barometer has been shown to be statistically correlated with the Payrolls number and is closely watched.

The strength of the employment component suggests that Friday’s payrolls number could indeed come in strong with market consensus forecasting a 170k print vs. last month’s 151k reading. However, the strength of the employment component of the ISM  was not matched by the slightly disappointing ADP reading which printed 154k in September, below expectations of 165k.

Overshadows Weaker ADP Number

Although still broadly in line with strong but cooling labour market conditions, the number marks the lowest reading since April. In light of the strong ISM number, the miss was not deemed wide enough to sway expectations ahead of the payrolls expectations ahead of the release tomorrow.

Looking back over the last quarter in the survey’s results,  the strong rebound in September ISM Non-Manufacturing simply offsets the declines seen in July (-1 point_ and August ( -4 points) and it is not currently what fuelled the prior declines and subsequent recovery in September though perhaps a delayed negative reaction to Brexit which then subsided.

Average ISM Number Roughly Unchanged Over The Year

However, looking through the month on month volatility in the readings, the average ISM Non-Manufacturing level over August/September (54.2) is actually slightly down on the average level of the first 7 months of the year (54.6). The number is also significantly weaker than the average figure over 2015 (57.1).

Hence, although concerns over an impending recession have been negated, for now, these data sets still highlight a downward shift in growth. Also of note is that although 14 of 18 industries reported an expansion in September and had mostly positive comments about business conditions, they did note “A degree of uncertainty does exist due to geopolitical conditions coupled with the upcoming US presidential election”.

US 10Y Yields Up

Bond Yields jumped in response to the data with 10Y Treasury yields spiking over 4bps to levels just shy of the pre-Brexit high before reversing to the end the day around 2bps off the open. Despite the pull back into the close, 10Y yields were still up around 17bps since the lows last month. European bond yields were up already in response to news of possible ECB tapering and were accelerated by the data with 10Y Bund yields up over 5bps on the day.

The positive data provided a further lift for the US Dollar ahead of tomorrow’s employment report, extending gains seen on Monday’s positive ISM Manufacturing data. The headline Manufacturing index rose to 51.5 in September beating expectations of 50.4.  Again, broad-based improvements were seen across most activity gauges. New orders and production indices improved significantly to 55.1 from 49.1 and to 52.8 from 49.6 respectively.

US ISM Manufacturing Index
US ISM Manufacturing Index

This again suggests growth in employment. Inventories and backlog of orders also improved to 49.5 from 49 and from 45.5 respectively implying a likely increase in production over the coming months. New orders, however, were slightly weaker though broadly in line at 52 vs. 52.5, consistent with the view that the negative effects of a stronger USD on exports are now waning.

These data sets on the Manufacturing and Non Manufacturing sectors are positive and consistent with other recent data sets such as the Chicago PMI which surveyed business over the first three weeks in September and printed 54.2 against an expected 51.5. All attention now turns to the US employment reports tomorrow.

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