December ISM Manufacturing PMI Strongly Beats Expectations

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• ISM Manufacturing PMI for December prints at 60.7 versus forecast of 56.6
• Manufacturing sector is better prepared to handle rises in Covid cases
• New Covid strain and new lockdowns in UK threaten bullish market sentiment

December ISM Manufacturing PMI Strongly Beats Expectations

Expectations of a slowdown in US manufacturing activity in December were calmed Tuesday morning when the December ISM Manufacturing PMI printed a strong beat of 60.7 versus a forecast of 56.6. November’s Manufacturing PMI printed at 57.5 versus a forecast of 58.0, and forecasters had expected a further fall in the index for December.

Monday saw IHS Markit report its Manufacturing PMI for December at 57.1 versus a forecast of 56.6, the highest print for the year. Tuesday’s ISM report helps to affirm that the manufacturing sector has learned how to cope with Covid without activity suffering.

Manufacturing PMI serves as an import proxy for US GDP data, giving markets a closer and more timely look at an important component of the US economy. PMI prints above 50 denote an expansion and below 50 denote a contraction.The ISM Manufacturing PMI dipped into contractionary territory in March and bottomed in April.

It remained contractionary in May as reopenings began and then crossed back into expansionary territory in June, where it has since remained. While the report fell between October and November, December’s print of 60.7 is a high for the year and shows continued expansion in manufacturing activity.

While manufacturing continues to fare well despite rising Covid cases, other sectors of the economy are facing challenges. Services, which account for roughly 75% of US GDP, are much more susceptible to Covid-related slowdowns. ISM Services for November printed at 58.0 versus a consensus forecast of 60.9, a sharp miss.

December’s Services data prints on Thursday and will provide markets with a closer look at the most important component of the US economy. The new, more contagious strain of Covid has been identified in countries around the world, including in the US. New national lockdowns in the UK and extended lockdowns in Germany increase the chances of another slowdown in global economic activity.

Dow Jones Price Chart: 1 – Minute Time Frame (January 5, 2021)

Chart Prepared by Izaac Brook, Source: TradingView

As the US industrial’s index, the Dow Jones Index is likely to see a reaction to Manufacturing PMIs. The Dow rose by around 30 points following the strong print. However, the market’s overall reaction to the ISM print was relatively muted. Monday’s Markit ISM beat may have caused a potential PMI beat to already be priced in.

Either way, the DXY fell to a fresh two-year low Monday but traded in the green this morning. It rose on the strong print but quickly returned to its pre-print level. As today’s session advances, markets will focus on the results of the Georgia Senate runoffs, which will determine whether the Democratic party will hold a majority in the Senate for the first two years of the Biden administration. Such a result could significantly change the market expectations surrounding the new administration.

--- Written by Izaac Brook, DailyFX Research Intern