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US: Manufacturing drop not going to affect Fed lift-off plans - ING

FXStreet (Delhi) – James Knightley, Senior Economist at ING, suggests that even though the US ISM index suggests that the manufacturing sector is flat-lining, but outside of the sector things are looking good.

Key Quotes

“Yesterday’s ISM manufacturing index for September came in at a rather disappointing 50.2, down from 51.1 in August and weaker than the consensus forecast of 50.6. The details showed production dropping to 51.8 from 53.6, new orders at 50.1 versus 51.7 previously while employment dropped to 50.5 from 51.2. Weaker external demand is a key story with the new export orders series firmly in contraction territory at 46.5 – the China slowdown and dollar strength are clear issues here.”

“While it was a disappointing report we have to remember that the manufacturing sector only directly accounts for around 15% of economic activity and other sectors seem to be doing reasonably well.”

“Certainly, yesterday’s domestic auto sales numbers were very strong (14.36mn – more than half a million more than expected!), boding well for retail sales, while construction output was up 0.7% MoM. In fact, in YoY terms, construction spending is rising nearly 14%, with residential construction growing 16%.”

“So, assuming we are right and we get a 200k+ payrolls number today and average earnings pick up to 2.4% YoY from 2.2% YoY there is still a very strong likelihood of a Fed rate hike before year-end. October may be an outside chance, despite the hawkish Richmond Fed President, Jeffrey Lacker, suggesting yesterday that it is possible, but we do think the market is being far too complacent in pricing in only a 40% chance of a move by December.”

“After-all, Fed Chair Janet Yellen continues to state that "most participants continue to expect that economic conditions will make it appropriate to raise the target range for the federal funds rate later this year".”

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