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U.S. ISM Manufacturing

03/04/2013

On Friday morning, March 1, 2013, the U.S. ISM Manufacturing Index (Figure 1.1) for February activity was reported at 54.2. This was well ahead of last month’s 53.1 and consensus estimates for an actual monthly decline to 52.5 for this report. The headline 54.2 reading is the highest figure since June 2011’s 55.8. In advance of this report I highlighted its potential significance to the S&P 500® Index (SPX) (Figure 1.2) price direction. The subsequent SPX price did not disappoint, reversing a very weak early tape and setting a positive tone for the first trading day of March.
 
The composition of the report was strong on balance. In particular, the much watched new orders to inventories ratio climbed from +2.3 to +6.3. The production index climbed from 53.6 to 57.6. Employment did soften from 54.0 to 52.6, which suggests next Friday’s February labor report may struggle to significantly exceed the January report.

January Labor Report   

Actual

February 1, 2013

Headline +157,000

Private +166,000

Rate 7.9%

February Labor Report

Estimate  

March 8, 2013

Headline +160,000/+175,000

Private +165,000/+180,000

Rate 7.9%

 This week I posted a blog titled “Blaring Bell.” Within that blog I offered my expectation that the SPX was experiencing a pause in appreciation. Friday’s ISM is consistent evidence of “a pause,” not evidence to a deeper price correction. Further important evidence presents itself this week with the Friday, March 8 labor report.
 
I would also highlight that risk assets which appear most “bond like” continue to be desired. The 10-year U.S. Treasury (Figure 1.3) is trading at 1.85%, now only 9 bps above this year’s 1.76% opening price and below 2013’s high yield print at 2.0278%.  Bond-like sectors, health care and consumer staples, have posted the best year-to-date performance, while global growth sensitive raw commodities and material names continue to underperform.
 
Lastly, of the $11.3 billion received by mutual funds for the week ending February 20, $4.12 billion went to taxable bond funds and $590 million to municipal bond funds. Domestic equity funds received $1.09 billion, and international equity funds received $3.4 billion.
 
U.S. ISM Manufacturing Composition

Sub Index

February 2013

January 2013

December 2012

New Orders

57.8

53.3

49.7

Inventories

51.5

51.0

43.0

Production

57.6

53.6

52.6

Imports

54.0

50.0

51.5

New Export Orders

53.5

50.5

51.5

Employment

52.6

54.0

51.9

Prices Paid

61.5

56.5

55.5

Figure 1.1 U.S. ISM Manufacturing March 2009-February 2013

Source:  Bloomberg

Figure 1.2 SPX Intraday Friday March 1, 2013

Source:  Bloomberg

10-Year U.S. Treasury March 2012 to February 2013

Source:  Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.