FOREX TRADING

ISM Manufacturing: Production Increased in March

ISM Manufacturing came out yesterday at 59.6 signalling that the bounce in the manufacturing sector is still very much intact. The report was much better than both we (56.5) and consensus (57.0) expected, and was actually better than the highest estimate in a Bloomberg survey (59.0).

The pace of growth in manufacturing is the fastest in five years and confirms our view from yesterday’s preview that the crash in late 2008 caused producers to panic and reduce activity too much. With the economy now growing again, producers are cranking up production in a response to increased demand and in an effort to replenish inventories, which are at very low levels. We still would like the service sector to show more signs of life (ISM Non-manufacturing is out on Monday) as inventory restocking is only feasible up to a certain point, thereafter demand must take over.

Digging deeper into the report, there are a couple of noteworthy numbers. With today being Nonfarm Payrolls day, it is interesting that ISM Employment did not grow at a faster pace in March (55.1) than in February (56.1). In other words, purchasing managers in the US are not hiring at a faster pace in the manufacturing sector. This supports the ADP report out a couple of days ago, which surprised to the downside (actual: -23,000, consensus est.: 40,000).

New Orders, often considered a leading indicator for the overall index, grew steadily in March (61.5), but still remains below both January and December. The difference between New Orders and Inventories is also closely followed and it continues to fall. It is now at 6.2 down from a peak of 28.1 in August 2009, signalling that inventories’ contribution to GDP has probably already topped in the fourth quarter of last year where the economy recorded an impressive growth in GDP of 5.6%.

Elsewhere in the report Prices Paid rose to no less than 75.0 from 67.0 in February, which is the highest level since August 2008 and points to increasing inflation. Note, however, that unlike most other components in the ISM Manufacturing report, Prices Paid is not seasonally adjusted.

Overall it was a solid report, but some of the components nevertheless disappointed.

Saxobank

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