Macro Report:October ISM manufacturing index climbed to 51.9as gradual recovery continued

October’s ISM manufacturing index continued the recovery seen in September,and further confirmed that the sharp drop seen in August was a blip rather than thestart to a negative trend. Combined with the recent performance of leadingindicators, the solid ISM data indicates that US economy has maintained itspositive momentum to start 4Q16.

    Positive signals included the continued acceleration of the employment sub-index,which surged 3.2 ppt to a 16 month high of 52.9. Manufacturing sector jobs havecontributed very little to new nonfarm payrolls since the start of 2015; if thisrecovery is sustainable, we may see further reduction of job market slack inupcoming months.

    Prices, a historically very volatile sub-index, also accelerated further to 54.5 inOctober, in line with the acceleration of commodity prices seen through most of themonth. A low base effect could push inflation higher in the upcoming months. Withthat said, as wage push inflation remains relatively low, the sharp drop of oil pricesin the last week of October illustrated that a stabilization of commodity prices is notguaranteed. Overall, recent developments should keep the Fed on track to hikerates in December, and market probabilities have fluctuated between 70-80%.

    With that said, in the bigger picture, it appears that while manufacturing hasstabilized, a strong rebound is unlikely. Domestic demand has remained solidoverall in 2016, but showed some volatility in recent months, and it appearsincreasingly likely the US economy is in a late cycle expansion, as the end of 2016will mark the 7th consecutive year of recovery. Compared to relatively strong yearsof growth in 2014 and 2010, the ISM remains at a relatively low point. While weremain cautiously optimistic on the near term outlook, upside seems limited andexternal risks are set to escalate soon, meaning that watching for downside risks isincreasingly important.