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As I expected last week, the December U.S. PMI was quite strong, pushing stock markets up to the new high of the last two years. The December PMI is 57 compared to the November PMI 56.6, showing the economy was growing well last month. Moreover, both the production index and the new orders index enjoyed strong growth. The December production index is 60.7 compared to 55 in November. The December new order index is 60.9 compared to the November 56.6.

Also as expected, the ISM Prices Paid index also increased in December, 72.5 compared to 69.5 in November. While a few sectors reported decreasing production and new orders in December, such as Nonmetallic Mineral Products, Paper Products, and Printing & Related Support Activities, none of the 18 manufacturing industries reported paying lower prices on average during December.

Then, when manufacturers saw demand growing fast, they were cautious and added fewer jobs than in November. The December employment index (55.7) shows that employment was still growing, but the speed was slower than November (57.5).

This relative weakness in the December PMI Employment index could suggest a weak reading of the nonfarm payroll in December, which will be released this Friday. In 2010, the monthly correlation between the PMI Employment index and the nonfarm payroll number is 0.77. The PMI survey result has been quite accurate.

Furthermore, on Wednesday, the December U.S. ISM Non-manufacturing Index will be released. Besides the usual important composite index and new order index, I would like to see the reading of the employment index in December, since it may further offer us a hint about Friday’s nonfarm employment payroll. The monthly nonfarm employment number is also strongly and positively correlated with the monthly ISM Non-manufacturing employment index in 2010, as the correlation is 0.73. Therefore, a clear reading in the December ISM Non-manufacturing employment index, combined with the PMI Employment index, should at least help investors get a better sense of employment before the release.

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Lastly, ADP private employment change will also be released on Wednesday. This number is likely to help set the market expectation of the nonfarm payroll on Friday. Then, next week, the stock market is going to embrace the earnings season, when economy data is likely to take the back seat.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: PMI, ISM Non-Manufacturing Index and ADP Report Offer Employment Report Clues