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Friday Look Ahead: Bull or Bear, ISM Manufacturing Could Settle It

In just a week, market expectations for Friday's ISM manufacturing report have swung from fears it would signal economic contraction to optimism it could be better than economists forecast.

The June manufacturing ISM has been one of the most talked about data points of the past two weeks, as first negative reports from the Philadelphia Fed and New York regions showed a surprising decline, during last week's gloomy market days. But now, the regional reports are showing improvement, and stocks have been roaring higher and bears are stalking bonds.

On Thursday, both Chicago PMI and Kansas City Fed regional data surprised to the upside. The Institute for Supply Management, Chicago said its barometer rose to 61.1, after dropping to 56.6 in May. Economists had expected 54.

So the whisper numbers, which were for a weak ISM below 50, have given way to talk that the index of national factory activity could be better than expected.

"That's going to be pretty big because you've gotten data from Chicago today, and you've seen a couple of regional Fed reports beginning to perk back up, so there's a very soft drumbeat that maybe the soft patch is ending," said Art Cashin, director of floor operations at UBS.

J.P. Morgan, Credit Suisse and Deutsche Bank all raised their forecasts for the ISM, which is forecast to be 51.8 when it is released at 10 a.m. Construction spending is also reported at 10 a.m., and consumer sentiment is released at 9:55 a.m. Another important data set comes from the auto industry, when companies report their June sales throughout the day. The annualized sales rate for June is expected to be 12.2 million, up from 11.8 million in May but still beneath the levels economists expect to see later in the year.

The better Midwest regional data also supports the view that auto manufacturing is beginning to make a recovery, after the Japanese supply chain disruptions forced shut downs. It also comes at the start of the second half of the year, which economists expect to be better than the first half. They had expected to see reacceleration of the auto industry, with more impact in July than June.

"I've been an economist for 20 years, and I've never spoken to so many people before about this number," said Credit Suisse economist Jonathan Basile, adding many of his conversations were with people in the equities market. Basile raised his estimate for ISM to 53.5, even with May's number.

"Four of the six regional surveys showed new orders going up. It was only the New York and Philly numbers where orders were lower," he said. An ISM above 50 is viewed as an indicator of growth, but there have been times when the number dropped temporarily below that level without signaling recession.

Basile said while the Chicago number is often "noisy," it does tend to lead directionally and has led the ISM for the past seven months.

While the ISM number may improve, jobs have not. Jobless claims Thursday were higher-than-expected, at 428,000, stuck at an elevated level for more than two months.

After the ISM report, market focus will quickly move on to next Friday's June employment report. "The employment indicators look consistent with a downshift in job growth," said Basile.
He also noted that the ISM report that represents a much bigger part of the economy is not getting the buzz that surrounds the manufacturing report. The ISM non manufacturing survey is released Wednesday. The ISM data also have a jobs component that is closely watched.

QE2 Sails, Bonds Under Pressure at Quarter End

Thursday also marks the end of the quarter, and the first half of the year. The Dow, negative for the quarter before this week's rally, is up 0.8 percent at 12,414. It rallied 152 points Thursday, giving it a 4 percent gain for the week and making up more than half of its recent 7 percent decline. The S&P rose 5 to 1320 Thursday, and was up 0.4 percent for the quarter and is up 4 percent this week.

At the same time, Treasurys have come under heavy selling pressure this week, as investors focus on the potential for improving data and the end of the Fed's quantitative easing program (QE2). The Fed's $600 billion Treasury purchase program, or QE2, officially ended Thursday. The bond market over the past several days has seen a quick reversal from last week's run up, when yields, which move inversely, were heading sharply lower. The 10-year Thursday broke its 200-day moving average of 3.14 percent, well above the 2.84 percent yield of last Friday.

"I think the calendar has a lot to do with it," said David Ader, chief Treasury strategist at CRT Capital. "What was the Greek situation worth to our bond market -- 30 or 40 basis points on the 10-year." He said the 10-year yield could move to 3.25 percent near term, but the next several weeks will give a better look at market direction, as more economic data is released and the Treasury auctions $65 billion in notes and bonds, absent the major purchases by the Fed.

"I really don't know how we're going to deal with the supply by ourselves," he said.

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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