Today's stock market price action looks like a case of short-covering panic. Traders pushed the buy button as soon as they saw ISM Mfg PMI. While the report looked very solid on all components, I would like to concentrate your attention on the employment index. It is very important to identify that while this component has been rebounding since Nov of 2011, it certainly looks like its rate of expansion peaked earlier last year. Below you will see a chart going back 40 years, which shows that after each recession and a deep dive, manufacturing employment rebounds sharply, but expansion rate hits a brick wall at around 60. Obviously, "this time could be different", but with many facts pointing to how structural the unemployment currently is, it would be hard to imagine that we will break a 40-yr trend. I identified (with white arrows) where I think we are in the current post-recession cycle compared to the previous ones. The latest improvement may be a retracement before another move lower.
Shorts panicked when they saw this morning's ISM report, perhaps because Mfg is such a leading sector of the economy, and they thought that NFP later this week could surprise on the upside as well. I personally think that it was too premature to jubilate, and think that ADP tomorrow morning will give us a better hint on what April's NFP may look like on Friday.
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| click on chart to enlarge |
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