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A couple of things....
- Chinese/ US manufacturing
- Price pressures could de-rail ISM, bad news for stocks
The US ISM is released at 1330 GMT today (0830ET). The market is expecting another multi-year high of 61.00. And the strength in the index has been fairly broad based, the New Orders component rose to 64.9 high in January.
At the same as the US ISM has been hitting multi-year highs, the Chinese PMI has started to come off. The index fell to 52.2 in February.
As you can see in the chart below, Chinese/ US ISM indices tend to move together, albeit with a lag. The Chinese index peaked in Dec 2009, whereas the US index didn't peak until March 2010. Whereas the Chinese PMI recovery that started in July 2010 peaked in November 2010, the US ISM recovery that started in Sept 2010 is still in full-swing (see below).
Chinese PMI (white line) and US ISM
We would look for the US ISM to peak in the coming months based on the traditional relationship with the Chinese index and also due to increasing price pressures in the sector. The prices paid index is expected to rise to a 2.5 year high in Feb at 83.00. Inflation is alive and well in the manufacturing sector and if price pressures continue to expand this could hurt business.
So what does this mean for traders?
The ISM index moves closely with stocks (unsurprisingly, as it is a good pre-curser to GDP). If we see the ISM peak in the coming weeks due to price pressures then this is bad news for stocks. But for now, it means that rising prices (e.g. oil prices) are unlikely to hurt equities in the short-term as the underlying US economic recovery is strong. But, if price pressures continue to grow then this will eventually hurt business, weighing on both the ISM and stocks.
So, stock investors out there should look to the ISM to see where stocks are headed.
ISM Manufacturing index (white line) and S&P 500 index (monthly chart)
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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