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Will Robust Manufacturing ISM Index Bolster US Risk Appetite?

Will Robust Manufacturing ISM Index Bolster US Risk Appetite?

2018-12-03 17:09:00
Richard Dvorak,

Talking Points:

  • Hiring improved on strong demand for new orders
  • Inflation moderated despite rising labor, raw material input costs
  • Business optimism falls citing unsustainable growth trend

A strong reading from the Markit US ISM Manufacturing Index this morning may further risk-taking appetite following favorable developments over the weekend at the G-20 summit. November’s index notched 59.3 compared to 57.7 a month prior and beat survey expectations of 57.5.

The healthy report shored up confidence in the US economy as investors grow increasingly anxious over slowing growth prospects and how much life is left in the bull market. The ISM Manufacturing Index, which is a closely watched leading indicator due its timely release relative to other economic data, provides information on the manufacturing sector that makes up over 10 percent of GDP in the United States.

The two components of the index gauge inflation and labor conditions which both improved from prior readings. This dampens concerns raised about the global economy after several lackluster reports on manufacturing have been released out of the Eurozone recently. The above-trend reading out of the US for November helped reassure markets as new orders rose at the fastest pace in six months providing encouragement that consumer demand remains robust.

US manufacturing ism vs S&P500 price chart

To meet demand for new orders, hiring in the manufacturing sector has grown at the second fastest pace this year. Increasing costs may begin to take its toll on the economy’s performance, however. Aside from labor, raw material input costs have been on the rise as fear of further tariffs from an escalating trade war with China induced stockpiling. Although costs are trending up, the rate of inflation was lower than it has been as of late. This is reflected in the low November ISM Prices Paid Index of 60.7 vs 70.0 expected compared to 71.6 in October.

On a less bright note, manufacturer business optimism for 2019 fell to the lowest level in over a year with only 3 percent of reporting companies expecting output to be higher one year from now citing the sustainability of current growth. After a strong gap up in early trading, US equities have been losing momentum following the report.

S&P500 1 minute price chart

--Written by Richard Dvorak, Junior Analyst for DailyFX.com

-- Follow on Twitter @RichDvorakFX

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