How to Trade ISM Surveys.

WHAT IS IT?

The Institute of Supply Management’s manufacturing and services indices are a monthly survey of US purchasing managers in the US, and are considered to be key indicators of the state of the US economy. The purchasing managers committees are based in industries weighted on their contribution to GDP. The data is compiled via an aggregation of various diffusion indices covering: Business Activity, New Orders, Backlog of Orders, New Export Orders, Inventory Change, Inventory Sentiment, Imports, Prices, Employment and Supplier Deliveries. Some indices like the New Orders data are considered leading indicators and have correlated well with stock market performance over time. These data sets are also useful because they give an indication of activity before shipping of goods and services takes place. Trend following traders also find the data useful in helping to spot long-term turnaround in trends.

THE ANNOUNCEMENT

The two data sets are usually released in the first few days of the month and are published to the Newsquawk news feed as well as announced over the audio squawk. Typically we squawk the “headline” first and follow up with some of the key sub-indices like New Orders, Prices Paid, and Backlogs.

EXPECTATIONS

The ISM itself is a national survey but there are many regional Fed surveys released in advance of the ISM data that help us to get a feel of the underlying picture. Two of the key surveys being Empire Fed Manufacturing and Philly Fed Manufacturing. On occasion, this also results in some of the regional Fed surveys becoming market-moving events, especially when they run counter to the general expectations. There is also an alternative purchasing managers index released by S&P Global, that has a similar purpose to the ISM data.

A POSITIVE ANNOUNCEMENT

Given that the survey has a leading quality, a reading above expectations will usually be a sign of healthy economic activity ahead and have the following impacts:

• Equities: Positive for equity markets
• Fixed Income: Negative for bond markets
• Forex: Positive for the US Dollar
• Energy: Slightly positive
• Metals: Negligible to positive

A NEGATIVE ANNOUNCEMENT

A negative announcement would usually be expected to have the opposite effect and have the following impacts:

• Equities: Negative for stocks, as the prospects of future growth clouds
• Fixed Income: Positive for bonds as the economy may require further support
• Forex: Negative for the US Dollar
• Energy: Slightly negative
• Metals: Negligible to negative

BIGGER PICTURE

It is important to note that sometimes market expectations can run ahead of themselves; diffusion indices like the ISM and the S&P Global PMI data means that any reading above 50 still represents growth, while any reading below 50 signals contracting activity (the level 50 itself is considered neutral). Accordingly, there are often situations where the index can slow from the high-50s to the mid- or low-50s; this represents a slowing in the rate of expansion rather than a contraction.