Signs of more tailwind despite fall in ISM manufacturing in April

ISM manufacturing declined one index point to 50.8 in April from 51.8 in March. The fall in ISM manufacturing in April came after a sharp rebound in the last couple of months and looking at the details we still think it was a decent release showing that manufacturing sector has stabilised after some difficult months by the end of 2015 and at the beginning of the year.

Although new orders and production both declined in April, they stayed at levels not seen since the year-end 2014. It is also noticeable that new export orders rose to 52.5 from 52.0, the highest level since November 2014. The weaker USD and stabilisation in China likely play a role here.

The employment subcomponent increased to 49.2, the highest level since November last year. Although this suggests that the job losses in the manufacturing sector continued in April, they should have done so at a slower pace. So also the correction in manufacturing employment seems to have come to an end.

The inventory correction continued as customer inventories fell to 46.0 from 49.0. The combination of still high new orders and low inventories suggests that ISM manufacturing should go higher in the coming months.

Still we think ISM manufacturing is likely to stay subdued slightly above 50 in the coming months, but looking 3M-6M ahead we expect it to move higher. Weaker USD, stabilisation in China, lower credit spreads, an end to the inventory adjustments and the higher oil price are all supportive for the US manufacturing sector.

In terms of releases this week, we are looking forward to the ISM non-manufacturing on Wednesday and the jobs report for April on Friday. While ISM manufacturing is important for sentiment, we think that the Fed is looking for signs in the ISM non-manufacturing index that we should see a rebound in Q2 GDP growth after the significant slowdown in Q1. We expect nonfarm payrolls rose 210,000 in April (consensus: 200,000), more or less in line with the recent trend, leaving the unemployment rate unchanged at 5.0% due to the increasing labour force. As long as employment continues to rise at a solid pace, we think the Fed has its eye on things other than employment growth such as wage inflation. We would keep an eye on average hourly earnings, which we estimate rose 0.25% m/m in April, implying an unchanged wage inflation rate at 2.3% y/y.