ISM manufacturing has stabilised although at a weak level. This was still positive as some of the regional indices (Empire and Dallas) pointed towards a sharp decline. Also Markit PMI manufacturing has stabilised. We expect ISM manufacturing has hit the bottom and that the index will rebound slightly in the coming months. However, the index will probably stay weak as the manufacturing sector still suffers from a combination of the very strong USD, the slowdown in manufacturing globally (China) and the lower activity in the US energy sector.
Some important subcomponents were better than headline. New orders, which usually leads the headline index, increased to the strongest since August 2015. The increase in orders was driven by domestic demand as new export orders declined sharply. The order-inventory balance indicates that ISM manufacturing should increase slightly towards 50.
While the ISM manufacturing index is important for market sentiment, we think the Fed will put more weight on the ISM non-manufacturing index due on Wednesday as it accounts for a larger share of the economy. Besides the release of ISM non-manufacturing on Wednesday, eyes are on the January jobs report on Friday.
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