US: What To Expect From Friday's ISM
Danske Markets | May 30, 2012 07:13AM ET
- In May the list of manufacturing surveys grew longer, as we saw the release of the first manufacturing PMI survey from Markit Economics.
- We continue to favour the ISM over the Markit PMI as a predictor of activity in the manufacturing sector due to the longer history of data. That said, using only data back to mid-2007 the predictive power of the PMI for production, employment and inventories is comparable to the ISM.
- If we adjust for the difference in weights, the Markit PMI has had a very strong correlation with the ISM over the past year. If this relation continues to hold, the flash PMI suggests a decline in the ISM to 53.5 on Friday. This is in line with our models suggesting a one-point decrease to 53.8.
- There is no doubt that the global industrial production cycle is turning softer and this is also starting to be felt in the US. That said, an ISM at 53 suggests manufacturing production growing at a 3.5% annual rate, which is still decent.
A Detailed Look At The Markit PMI
With the release of the first-ever Markit PMI in May, we obtain yet another source of insight into the state of the US manufacturing sector. With a sample almost twice the size of the ISM sample and a flash estimate released around a week prior to the ISM, it could become an interesting market mover going forward.
With historical data going back to mid-2007, compared to ISM data dating back to 1948, it is, however, not possible to track the performance of the Markit figure until we have some more data points. Based on the relatively short data sample we have, the ISM and the PMI do nevertheless seem to follow each other nicely, with a correlation of around 90%.
The Markit PMI composite is a weighted average of five sub-indices, the same as the ISM, but the weighting differs. The Markit attaches larger weight to the output and new orders sub-components but reduces it for inventories (stock of purchases) and delivery times (see table at the right). If we use the ISM weights on the Markit data (see the first chart below) it is clear that the two figures have been more or less in sync over the past year. This speaks in favour of using the flash PMI as a predictor of the ISM.
Predictive Power Of The Markit And ISM Sub-Indices
Using the different sub-components of the two manufacturing surveys, it is possible to construct simple regression models for relevant hard manufacturing data, such as manufacturing productions and core durable goods orders. By comparing the predictive power of the different sub-components over a similar sample period (mid-2007 to today), we find that the ISM and the Markit survey by and large contribute with the same amount of information.
Get The News You Want
What To Expect For Friday's ISM Release
On 24 May the first release of the Markit flash PMI showed a deterioration of economic conditions in the manufacturing sector, falling to 53.9 down from 56.0 - still remaining well within expansionary territory. Adjusting for the different weighing of the ISM and the PMI, this points to an ISM reading of 53.5 on Friday. This is in line with our prediction of a one-point drop in the ISM to 53.8, based on our model consisting of local PMI surveys and a wide range of economic and financial indicators. Even though the slowdown in global growth is starting to be felt in the US manufacturing sector, an ISM at 53 corresponds to manufacturing growth at 3.5% annually, which is still a decent growth rate.
This research report has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank").
Analyst certification
Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research an alyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report.
Regulation
Danske Bank is authorized and subject to regulation b y the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request.
The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of th e Danish Securities Dealers Association.
Conflicts of interest
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. E mployees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to the Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank.
Research analysts are remunerated in part based on the over -all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions.
Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request.
Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.
Expected updates
Danske Daily is updated on a daily basis.
First date of publication
Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication.
General disclaimer
This research has been prepared by Danske Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a soli citation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ("Relevant Financial Instruments").
The research report has been prepared independently and solely on the basis of publicly available information which Danske Bank considers to be reliable. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness, and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report.
The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgment as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in the research report.
This research report is not intended for retail customers in the United Kingdom or the United States.
This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior written consent.
Disclaimer related to distribution in the United States
This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to “U.S. institutional investors.”
Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements of a non-U.S. jurisdiction.
Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in nonU.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.