Strong ISM but partly due to hurricanes - Danske Bank

"ISM manufacturing rose to 60.8 in September (from 58.8 in August), which was even higher than what we had pencilled in (60.0, which was the highest forecast among analysts) and against the consensus of a decline to 58.1. 60.8 is the highest level since May 2004, when it was shortly above this level," note Danske Bank analysts.

Key quotes:

"In our view, one should be cautious in not over-interpreting the increase, although the release still sends a strong signal from the US manufacturing sector. While some of the good subcomponents like ‘new orders’ and ‘manufacturing’ both rose, some of the increase is due to a big jump in the ‘supplier deliveries’ subcomponent. Usually, an increase in the ‘supplier deliveries’ subcomponent is good news, as it means it takes longer for the supplier to deliver inputs, i.e. a signal of a strong economy."

"However, the big jump in the ‘supplier deliveries’subcomponent in September is most likely due to the negative impact from the hurricanes Harvey and Irma, which the comments from businesses in the survey also suggest. The rise was the biggest since September 2008 and the subcomponent index is now at the highest level since summer 2004. The subcomponent contributes 1.46 index points of the total increase of two index points. If the ‘supplier deliveries’ was unchanged from August, the ISM manufacturing index would ‘only’ have increased to 59.3, which of course would still have been a strong signal, as it would have been one of the highest prints since the crisis. This may also help to explain the relatively muted market reaction, as markets usually would react more to such a ‘positive’ surprise, as we got today."

"Overall, we think the ‘supplier deliveries’ should fall back again when businesses return to normal in coming months, which should cause a decline in ISM manufacturing as well. In our view, this does not alter the picture that the US manufacturing sector is recovering after some difficult years in 2014-2016, although we are still puzzled about the big gap between ISM manufacturing and Markit PMI and perhaps the truth is likely somewhere in the middle. At least, ISM manufacturing has so far overestimated ‘hard’ production data."