Empire Manufacturing & Industrial Production
The Empire (New York) Manufacturing Index contracted in May to (-1.43) after last month’s +3.05 reading. Consensus estimates for the report were +4.00. The composition of the report was weak throughout and consistent with a manufacturing sector that is experiencing a spring slowdown.
Attention must now be paid attention to tomorrow’s Philadelphia Fed Business Outlook. Consensus estimates are for a +2.0 index reading after last month’s +1.3. Both the Empire Manufacturing and Philadelphia Fed reports provide valuable insight toward the all-important ISM Manufacturing Index (Figure 1.1) report out on June 3. Keep in mind, last month’s disappointing 50.7 ISM reading places the index in a vulnerable position for a potential slip below 50 for the first time since November 2012’s 49.9.
Composition of Empire Manufacturing:
- Six-month future activity, as measured by factory executive spending intentions, fell to 25.5 from 32 last month.
- New orders fell to (-1.2) from +2.2 last month.
- Shipments fell to 0 from +0.8 last month.
- Prices paid fell to +20.5 from +28.4 last month.
- Prices received fell to +4.6 from +5.7 last month.
- Factory employment fell to +5.7 from +6.8 last month.
Also reported today was Industrial Production which fell (-0.5%) in April after last month’s +0.4% increase. Consensus estimates were for a (-0.2%) reading. Last month’s figure was revised lower from +0.4% to +0.3%. This month’s decline was the largest monthly contraction since August 2012.
The Producer Price Index was also reported this morning, declining (-0.7%), the biggest monthly drop since February 2010.
COMMENTARY: In my estimation, this morning’s weak economic data provides clarity on where investors should be directing their attention. Within its May 1 statement, the FOMC sent the markets an interesting message: “The committee is prepared to increase or reduce the pace of its purchases.” Additionally, the FOMC acknowledged “downside risks to inflation.” However, an article by John Hilsenrath in this past Monday’s Wall Street Journal seemed to send a different message, that the markets should be prepared for a reduction in the pace of purchases much sooner than current estimates.
As I have stated all week on CNBC, I believe Mr. Hilsenrath’s message is one that investors should ignore. This morning’s weak manufacturing and inflation readings are evidence to that.
I do not expect the Fed will taper its purchases anytime soon. I expect a continued QE purchase pace that will support further S&P 500® Index (SPX) (Figure 1.2) appreciation as investors search for yield and reduce cash holdings.
Investors should continue to focus on assets that appear most bond-like. Nothing has changed. It remains a bond friendly world. A higher U.S. dollar (Figure 1.3), underperforming commodity prices (Figure 1.4) and a weak Australian dollar (Figure 1.5) provide evidence that the all-clear has not yet sounded for overweighting global cyclicals. An increase in global cyclical holdings would be warranted with a rise in the yield on the U.S. 10-year Treasury above this year’s 2.085% high concurrent with accelerating U.S. economic data.
Figure 1.1 U.S. ISM Manufacturing, May 2012 to May 2013
Figure 1.2 S&P 500 Index (SPX), May 2012 to May 2013
Figure 1.3-1.4 Higher U.S. Dollar = Lower Spot Commodity Prices (CRB Index), May 2012 to May 2013
Figure 1.5 Australian Dollar, May 2012 to May 2013