Sunday, November 21, 2010

ISM Behind The Headlines

Bulls are celebrating ISM Manufacturing and Services reports showing expanded growth (above 50 is expansion, below contraction). Looking inside the report shows some troubling signs though, primarily prices paid. As the USD has continued to get slammed the past few months, input costs have continued to rise. In this current economy, producers do not have pricing power on non essentials to pass along those higher prices. The result is their margins have been and will continue to get squeezed. To combat tighter margins, employers will begin laying off "non-essential" employees. New Orders in both reports have shown increased strength which is certainly a good sign for future ISM reads but is this solely due to the weak USD helping exports? Just like the EUR/USD was going to parity back in the summer, everyone is talking the end of the USD right now as the reserve currency. At some point that may very well be true but a reversal in the USD will put pressure on future ISM reads. Sovereign debt concerns have not passed, just kicked a little further down the road. Dec. 7 is national run on the bank day in France, which has now spread to a handful of other countries all as a result of austerity and another form of protest (important to remember EU banks are leveraged 10 times US banks). Don't be so quick to favor the EUR over the USD. Both currencies are bad but it's a lesser of two evils scenario right now.
So the ISM manufacturing and services both were positive signs for future growth of the US economy but need to be taken in context of what is driving them.


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