Comments on recent development
Following several months of decline, the ISM index saw a rebound last month from 48.4 to 50.7. As we noted in our comment, the comeback was mostly driven by a rise in production due to low inventory levels. As the new orders index remained subdued, the rebound did not seem sustainable.
This month the local indices have moved lower. A weighted average of the local indices suggests a fair value of the ISM of 47.3. On the other hand, inventory levels remain low and the orders data surprised positively in January, when stripping out the volatile components.
Our monthly model forecasts a modest decline to 49.0. Compared to this forecast we see downside risk due to the significant deterioration in the local indices. Consensus expects a reading of 48.0. On a three to six month horizon we predict that ISM will head for a level close to 45.0.