US Manufacturing Surprise

The US manufacturing ISM surprised the market in a favorable direction.  Rather than soften like the consensus expected, the diffusion index rose to 54.8 from 53.4.  This represents the strongest showing in eleven months.  The debate in the market has been over a soft landing in China, but this data (and the auto sales figures later) point to a soft landing in the US economy. 

The details were also constructive.  Measures of output and the forward looking orders were at the highest levels in a year.   Output rose to 61 form 58.3 and new orders rose to 58.2 from 54.5.  Fifteen of the 18 industries reported growth in orders and output.  None indicated a decline.  Even though Europe is contracting and China has slowed, US export orders rose to 59 from 54. 

The employment index rose to a10 month high of 57.3 from 56.1.  While it is tempting for economists to rise up their nonfarm payroll forecasts, they will likely wait for Wednesday's ADP report.   Prior to the report, the consensus was for a 20k increase in manufacturing jobs. 

Unfilled orders fell to 49.5 from 52.5, though the increase in new orders should offset this.  Inventories slipped to 48.5 from 50 and this is consistent with the underlying idea that since production was running ahead of sales, that inventories were a bit heavy and would need to be pared back. 

This is only April data and it would be premature to change views on Q2 GDP based on today's report.  However, it does suggest that the recent renewed talk of QE3 is also premature.  The risk remains that the US growth does not pick up significantly in Q2, but around 2 1/4% it is near the Fed's projections. 

The dollar strengthened in response as did the equity market.  The Dow Jones Industrials saw their highest intraday level since the end of 2007.    Bond yields backed up, but the 10-year yield remains below 2%.   The strength of the US economy also helped lift the Canadian dollar and Mexican peso.