Macro Report:May US ISM manufacturing index rebounded,supporting 2Q recovery

Despite outperforming consensus forecasts, a rebound of the ISM manufacturing index in May was in line with our expectations from last month. In our view, the underlying data behind the rebound of the ISM index this month is mostly positive, although the drivers are mostly tied to the less scrutinized data.

    Firstly, orders stabilized at steady levels for expansion, as new orders and export orders remained broadly unchanged in May, and are near or at the highest levels since 2014. However, the outlook is not clear; the return of rate hike expectations has led to a rebound of the USD, and there has been a clear negative correlation between USD strength and export orders. Whether or not a pickup of domestic demand can offset any negative impact from a stronger dollar will determine if the weak recovery of the manufacturing sector can hold.

    Secondly, we may be seeing signs of the inventory cycle beginning to bottom out. Customer inventories rebounded to 50.0, snapping a 3 month streak of contraction. Producer inventories dipped slightly to 45.0; we expect that if new orders remain strong, inventories and production will also gradually recover.

    Overall, despite three consecutive months of expansion of the ISM data, US manufacturing remains in a relatively sluggish state. The ISM data and the earlier published PCE inflation and expenditures data both point to a gradual recovery of the US economy in 2Q16, but are not strong enough to add pressure for the Fed to hike rates in June; upcoming jobs data on Friday remains the key data point to watch before the FOMC meeting on June 15th. Recent data has strengthened expectations for multiple hikes within the year; we maintain our forecast for 2 rate hikes in 2016.