ISM Beats, But Investors Remain Glum

by: Market Blog

By David Berman

Amid the post-Labor Day gloom, investors at least had one reason to refrain from all-out hopelessness: The ISM non-manufacturing index beat expectations in August, rising to 53.3 from 52.7 in July. That puts it higher into expansion territory and topped forecasts for a slide in service-sector activity to 50.5.

"The overshoot to consensus is trivial but this is a pleasant surprise nonetheless after a run of mostly horrible numbers,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a note.

Stocks, which were down sharply at the start of trading on Tuesday morning, took a brief pause in their downward journey – though not enough to inspire many investors. In mid-morning trading, the Dow Jones industrial average was down 267 points or 2.4 per cent, to 10,974. Canada’s S&P/TSX composite index was down 198 points or 1.6 per cent, to 12,405. Meanwhile, bonds continue to rally, sending yields down. The yield on the 10-year U.S. Treasury bond fell to 1.93 – a multi-decade low.

So why are investors overlooking this little gem of good news from the ISM index?

“The bad news is that it probably does not tell us much about the future path of the economy, because the headline index is little more than a lagging indicator of the rate of growth of core retail sales, which have held up well in recent months,” Mr. Shepherdson said.

As well, the forward-looking employment component of the ISM index moved in the opposite direction to the headline reading, sliding to an 11-month low. Thus, the ongoing gloom.

Disclosure: None