ISM adds case for strong dollar Q1 2017 - ING

James Knightley, Senior Economist at ING Bank noted that the US ISM manufacturing index has added to optimism on growth in the US.

Key Quotes:

"Strong activity and rising pipeline inflation pressures in the manufacturing sector back the Fed's decision to tighten monetary policy. We look for two more rate hikes in 2017.

The December US ISM manufacturing index has come in well ahead of consensus expectations, rising to 54.7 from 53.2 (consensus 53.8). There was strength throughout the report with new orders and production looking particularly solid, coming in at 60.2 and 60.3 respectively versus the break-even 50 level.

In fact the US was last recording these sorts of figures in late 2014 so it suggests that the US manufacturing sector has very strong momentum heading into 2017, especially when you consider the report was in contraction territory in August. Another interesting point being the strength in new export orders despite the strength of the dollar and offers more evidence that the global economy is looking healthier.

The employment component also looks pretty good, rising to 53.1. This is the fourth consecutive monthly improvement and has only been higher once in the past 2 years. This bodes well for Friday’s payrolls figure. Note also the big jump in prices paid component to 65.5 from 54.5, suggesting a marked pick-up in pipeline inflation pressures, presumably relating to energy costs. All in all it backs up the Fed’s decision to hike in December and will reinforce market expectations of additional tightening. We look for two further rate hikes in 2017."