Via Millan Mulraine at TDSecurities:
TD SECURITIES DATAFLASH
US: Chicago PMI Suggests Weak ISM Tomorrow
· The Chicago PMI indicator slipped back into contractionary territory, with the headline index declining to 48.7 in September from 54.4 the month before.
· As a result, we have lowered our forecast for the ISM manufacturing sector report tomorrow from 50.5 to 50.0, with downside risks.
· The forward-looking indicators were also quite weak, pointing to further weakening momentum ahead.
The Chicago PMI indicator fell back into contractionary territory, with the headline index falling to 48.7 in September from 54.4 the month before. This was well south of the market consensus for a more modest decline to 53.0, and it marks the fifth sub-50 print on this indicator since February. Over this period, the index has average a subpar 49.7, underscoring the continued weakness in overall manufacturing sector activity this year. On an ISM basis, the index also declined, falling to 50.1 from a fairly robust 55.7 print the month before. The overall tone of the Chicago PMI was very weak, and it corroborates the weakness we have seen in other regional PMIs. In fact, all 8 regional PMIs are now in contractionary territory. Taken at face value, this report points to a weak showing in the ISM manufacturing sector report tomorrow. As a result, we have lowered our forecast for the ISM report tomorrow from 50.5 to 50.0.
The details of the report were quite weak, with the key forward looking indicators mostly soft. New orders were particularly weak, falling to 49.5 from 56.78, while order backlog remained in contractionary territory, though it rose marginally from 46.2 to 46.5. The production index dropped sharply, falling to its lowest level since July 2009 to 43.6 from 59.0, suggesting a massive contraction in manufacturing sector production. The new orders to inventory spread remained entrenched in contractionary territory, pointing to further downside risks for production activity ahead.
To be sure, this indicator is quite volatile and historically it tends to exaggerate the movements in national manufacturing sector activity. Nevertheless, its disappointing showing is consistent with the sluggish performance in other regional PMIs. As such, our expectation is now for a disappointing performance in the September ISM manufacturing sector report tomorrow, and we see a non-trivial risk for this indicator to print below 50.