The Market's Direction Hinges On These Data Points

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This week we have several very important economic reports coming out. These top tier reports will give us key data on future indicators regarding factories, jobs, and consumer confidence.

The biggest report is coming out Thursday; the ISM Manufacturing Index. This forward looking report has a long track record of accurately gauging the direction of production, employment, new orders, inventories, prices, imports, and exports.

Source: Bloomberg.com

As you can see in the chart above, the ISM index was hurting for a long period of time, with a sustained dip starting in the end of 2014 and lasting all the way through 2016. The index began to bounce back in early 2017. But since February of 2017 the index has been getting stronger with energy, a weakening dollar, and the expansion of the global economy lifting the index.

Current expectations are for the index to dip just slightly from a reading of 59.3 to 58.7. While this would be a pull back, it would still show strength across all categories. Last month, new orders hit a 14 year high, with a reading of 69.4. Another strong report from the ISM would be an overall positive for the industrial, factory, manufacturing, and production segments of the economy.

On Wednesday, we will get a preview of the ISM report as the Chicago Purchasing Managers Index, or PMI is released. The Chicago PMI is the most important of the regional manufacturing reports, as it is seen as being a strong representation of the overall economy. This report has a long history of being highly correlated with the national ISM manufacturing index.

Source: Bloomberg.com

You can see the correlation between the two manufacturing reports, with the Chicago PMI falling in the beginning of 2014, and staying at low levels till the early parts of 2017.

Last month the Chicago PMI showed extraordinarily strong growth with a reading of 67.8, and Wednesday’s report is expected to come in just below that, at a reading of 64. This would still be very positive news for the manufacturing sector, as last month’s reading was near its historic high.

We will also be getting two forward looking jobs reports this week; the ADP Employment report, and Friday’s employment situation report. Of the two, the ADP Employment report is by far the most important.

The ADP is a preview of the monthly non-farm payroll report from the Bureau of Labor Statistics. This report sets the tone for the month, as it also gives us what wages are expected to do, and wage inflation. This data is closely monitored by the FED, as it has it is a key gauge of inflationary pressures, and it impacts the FED’s decision regarding monetary policy. Of late, wage growth has been holding around the 2% level, but expectations are for wages to start moving upwards towards the 3% level.

Source: Bloomberg.com

Wednesday’s report is expected to improve from December’s reading of 146,000 to 195,000 in private payroll growth. The data is expected to confirm that the jobs market remains very strong.

Lastly, but certainly very important economic data points we will be seeing this week regard the Consumer’s view of the economy. On Monday, the Consumer Confidence report comes out, and on Friday, we get the Consumer Sentiment report. Of the two, the Consumer Confidence data, is the most closely watched.

The Consumer Confidence report shows the consumer’s views on the overall economy, and their expectations for the next six months.

Source: Bloomberg.com

Last month, the index dipped from a 17 year high with a reading of 128.6 for November to a reading of 122.1 in December. But current expectations are for the index to move back up to a reading of 123.4.

Consumer confidence has historically been a key indicator for the future of both the stock and bond markets. This is due to the fact that consumer spending impacts two thirds of the economy, and a consumer who views the economy in a positive light tends to spend more. So, an uptick in this gauge is viewed as a positive future indicator for both the stock and bond markets.

If these data points come in as expected, it will set an overall positive tone for the markets for the next month.

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