Monday, April 2, 2018

Economy Looks Decent, So What's the Problem With the Market?

This morning's selloff in stocks isn't about the economy, per the following results from two key manufacturing surveys just released. Ironically, however, the Manufacturing Purchasing Managers report offers a clue (my highlight):

PMI Manufacturing Index

Released On 4/2/2018 9:45:00 AM For Mar, 2018
The manufacturing PMI finishes March steady and firm at 55.6, 1 tenth lower than the mid-month flash and 3 tenths shy of February. Strength in new orders, including export orders, is a highlight of the March report as is a 3-year high for business expectations. Output is strong but slowing and the sample continues to hire but at an easing rate.
Capacity strains are evident including the sharpest increase in delivery times in four years and also a jump in input costs with respondents citing rising tariffs and also rising raw material costs. And higher prices are being passed through to customers with selling prices rising to a 5-year high.

The data are piling up showing accelerating factory conditions including building signs of inflation. This index has been on the climb over the last half year but is still running noticeably cooler than the ISM report which has been running very hot and which follows later this morning at 10:00 a.m. ET.
 Looks like something more than a penny a soup can to me.
ISM Mfg Index
Released On 4/2/2018 10:00:00 AM For Mar, 2018

ISM manufacturing eased back from February's 14-year high, slipping 1.5 points and back below 60 to what is nevertheless an outstandingly strong 59.3 in March. And judging by sweeping strength for orders, whether new orders or export orders or backlog orders, the PMI may definitely return to 60 ground in the coming months.
Questions of capacity stress have to be raised given a second 60-plus reading for supplier deliveries which indicates lengthening times and suggests that the supply chain is increasingly jammed up. Input costs, at 78.1, are at an 8-year high. But stress isn't appearing yet in employment as the sample continues to find available applicants with the related index at a very strong 57.3, which however is down nearly 2 points from February.

This report proved its worth last year, being among the very first to report unusually strong conditions that actual data from the government is now increasingly confirming. But it's not really the strength of this sample that is most telling, rather it's the inflationary implications that will grab the most focus especially among policy makers at the Fed.

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