Instant View: ISM rises more than forecast in January

NEW YORK (BestGrowthStock) – The U.S. manufacturing sector grew at a faster rate than expected in January, according to an industry report released on Monday.

U.S. construction spending fell more steeply than expected in December to its lowest level since 2003, dragged down by a sharp drop in private residential and state and local government construction, a government report showed on Monday.

KEY POINTS:

ISM * The index reading was the highest since August 2004. * The Institute for Supply Management (ISM) said its index of national factory activity rose to 58.4 in January from 54.9 in December. The median forecast of 79 economists surveyed by Reuters was for a reading of 55.5. * A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion.

CONSTRUCTION * The Commerce Department said construction spending dropped 1.2 percent to $902.5 billion, falling for a second straight month. November’s construction spending was revised down to show a 1.2 percent decline, instead of a 0.6 percent fall. * Economists surveyed by Reuters had forecast construction spending falling 0.5 percent in December. For the whole of 2009, construction spending fell by a record 12.4 percent.

COMMENTS:

VASSILI SEREBRIAKOV, CURRENCY STRATEGIST, WELLS FARGO, NEW

YORK:

“The stronger dollar reaction is really a reflection of the upside surprise in the manufacturing ISM report. Not only is the headline stronger than expected, the breakdown also looks quite robust, especially the new orders and the prices paid components. I suspect the prices paid component might have caught the market’s attention given the large jump in those series. The number is not seasonally adjusted, so it probably overstates the strength somewhat, but I think this is a dollar positive report … especially looking at dollar/yen, which has been more sensitive to U.S. economic data in the sense that better U.S. numbers are good for the dollar against the yen.”

SUVRAT PRAKASH, U.S. INTEREST RATE STRATEGIST, BNP PARIBAS, NEW

YORK:

“It has certainly pushed yields higher although the sell-off is somewhat contained. We had already sold off a bit overnight and ahead of the main event of the week, which is on Friday, I don’t think the market is going to react too much to any of this data.

“We’ve actually seen a bit of a pull-back now. The Treasury market was selling off but the stock market didn’t go up that much on this number so that is going to limit how much Treasuries can sell off.”

STEPHEN GALLAGHER, CHIEF U.S. ECONOMIST, SOCIETE GENERALE, NEW

YORK:

“(ISM) were good strong numbers. Manufacturing is strong but the key is that inventories that drove the fourth quarter GDP up to 5.7 percent still has further to run in the early part of 2010. A lot of this manufacturing surge that we are seeing is really the result of business needing to replenish inventories that had fallen so dramatically during the recession. It is really telling me that the first half of 2010 is going to be supported by the restocking. We have a three to three and a half growth range for the first half of 2010 and based on these numbers we might be underestimating the growth. Everybody talks about it being unsustainable but maybe we need to rethink how long it will be sustained.”

MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES AMERICA, NEW

YORK:

“It was a very strong report, with an especially impressive reading on new orders. After a strong reading in December, new orders were up again in January. The strong order flow boosted production which also gave us a very strong reading.

“The employment index was up as well, above 50 percent for the third time in the past four months. I still look for a small decline in January payrolls on Friday. I use jobless claims as a guide and they’re not quite low enough to suggest payroll growth.

“The inventory number suggests firms are still cutting inventories which in one sense is good news because we know inventory building is still ahead of us. But it also suggests companies are still cautious about building up inventories because they’re not convinced the expansion is sustainable.”

ALAN LANCZ, PRESIDENT, ALAN B. LANCZ & ASSOCIATES INC, TOLEDO,

OHIO:

“The ISM number looks good on all fronts. The market is coming off an oversold condition, so it’s responding. The timing was good and it seems investors are taking note of it.

“If the numbers continue to impress that might give the Fed a little catalyst to at least change their (accommodative) rhetoric and that could spook investors.

“I think that’s definitely on their radar. Again one or two sets of numbers won’t matter but if this trend continues they might exit sooner than initially thought.”

DOUG ROBERTS, CHIEF INVESTMENT STRATEGIST, CHANNEL CAPITAL

RESEARCH.COM, SHREWSBURY, NEW JERSEY:

“I don’t think there is any huge surprises, the reaction of the market hasn’t been that major. What you’re finding is construction spending seems to be following the other existing housing data-worse than expected. Which is something we’ve been saying is not a problem that is solved overnight, there are long term imbalances that need to be addressed. There is also a lot of pent up problems that are being postponed rather than being addressed as well.

“The ISM data is consistent with an improvement from an inventory build, which we’ve been seeing as well, and we saw with the GDP data. So even though one was a little worse than expected and the other was a little better than expected, neither one would qualify as a huge outlier. They are consistent with what we’ve been expected.”

JAY MUELLER, SENIOR PORTFOLIO MANAGER, WELLS CAPITAL

MANAGEMENT, MILWAUKEE, WISCONSIN:

“The headline ISM number came in stronger than expected so that is good news. New orders did quite well. That is encouraging too, as one of the more leading components. The employment component was up just slightly and that is not terribly encouraging I would say.

“All of the employment numbers are showing that the huge losses in jobs are well behind us, but we are really not gaining jobs either. We are just dead in the water.

“What jumps out is the prices paid component, up to 70. Commodity prices have been moving up. How much of it is (due to) relative dollar weakness and general global demand is hard to say.

“Treasuries were off (with) two numbers indicating a little bit more vigorous growth than had been expected. The cost structure surge from an inflation perspective is not particularly good for bonds.”

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR &

ASSOCIATES, TORONTO:

“Taken together, the ISM and construction spending figures suggest that while confidence in business is improving, actual activity is only improving slowly. I don’t think this will impact trading today because of the earnings going on, and in general, some of the manufacturing numbers outside the U.S. have been playing a larger role.”

MARKET REACTION: STOCKS: U.S. stock indexes add gains BONDS: U.S. Treasury debt prices extend losses DOLLAR: U.S. dollar extends gains versus yen

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Instant View: ISM rises more than forecast in January