Weak ISM turned markets

illustration: wall street in new york

(02.08.2011) The debt agreement lifted market as expected yesterday, but after a much weaker than expected ISM, the market sentiment turned negative once again. Today the agreement will be approved by the Senate and President Obama.

By Knut A. Magnussen, Senior Economist at DNB Markets

As expected the stock markets reacted positively on the US debt agreement, comprising a higher debt ceiling and substantial cuts in (long-term) spending. This despite the fact the deal was not the best and that tighter fiscal spending will dampen growth in coming years. However, some market participants had probably feared lack of any agreement. Hence the stock market rebound was not a big surprise. The agreement was approved by the house of representatives yesterday and will be a approved by the Senate and the President today – just in time.
However, the positive market sentiment proved short lived. The ISM index for manufacturing fell a lot more than expected in July. The index is a very important indicator and may point at turnarounds at an early stage. The drop from 55.3 in June to 50.9 in July (the lowest in two years) was large and the index have no fallen almost 10 points since April. Even the most pessimistic had not expected that the index would fall more than to 53.0. New orders fell most, while the sub indices for production and employment fell more moderately. A level close to 50 for the overall index is normally consistent with GDP growing by around 2%. With so slow growth unemployment will rise further.

Markets reactions were strong. The US stock market turned negative, interest rates dropped while the USD strengthened (flighty-to-safety). European and Asian stock markets also ended in red. The CHF once again was the winner in the FX market, strengthening by more than 2% vs the euro over the past 24 hours.         
Besides the ISM other PMIs was released in many countries yesterday. As usual the Chinese were released first, showing a decrease both for the national and in particular for the private index. On average the two indices are still close to 50, implying that growth in China is still keeping up relatively well despite tight monetary policies.

In Europe most countries experience weaker PMIs.
In the eurozone the overall PMI fell by some 2 points as the flash estimates had indicated and is now close to 50. The British and the Swedish PMIs for manufacturing also fell substantially, to 49.1 and 50.1 respectively. Hence it seems that economic activity is slowing in Europe.       
With slower economic activity, there is no surprise that unemployment has started to pick up in the euro zone. The number of unemployment rose on June for the second month in a row, while the rate is still stable at 9.9%. However, there are large and widening differences between countries. German unemployment is only 6% - the lowest since the early 1990s – while Spanish unemployment is close to 21%. This obviously is very challenging for the ECB. The rate hikes so far this year should be seen in relation to the tight German labour market. It is not expected that the signal rate will be lifted further this week. 
Norwegian house prices continued rising July, albeit more moderately than earlier this year. Prices rose 0.6% seasonally adjusted from June to July, compared to 1% growth per month in Q1. Furthermore new data from Statistics Norway yesterday showed that housing starts have recovered markedly so far this year. The number of housing starts was 14.000 in the first half of the year, up 4.000 from the same period in 2010. If this tendency continues prices may rise even more moderately.

New car sales fell (seasonally adjusted) in July to the lowest level since December last year.
Despite this somewhat weaker data, Norges Bank will hike the signal rate once again at the upcoming rate meeting next week. Today the Norwegian PMI is due. It is expected somewhat to fall to 55.5.