Manufacturing has been in an uptrend in the past few months. Even though the ISM PMI has been high, this improvement probably has at least a few more months to go because yearly industrial production growth is still negative. The January Richmond Fed manufacturing index fell slightly from 19 to 14. The volume of new orders index was cut in half to 12. The local business conditions index rose 6 points to 10.

Forecasts were calling for the Richmond Fed's Manufacturing Composite to hold steady at the December reading of 19. Instead, it fell 5 points to the lowest level since July: https://t.co/UCrMNilLKn pic.twitter.com/3HYYHPvrfK

— Bespoke (@bespokeinvest) January 26, 2021

As you can see from the chart above, the vendor lead times index spiked to 39 from 31. This was the 3^rd highest reading ever. This means the time a purchase order is placed until the goods are ready is increasing. The trend of higher prices continued in this survey as the prices paid index was up from 2.1to 3.11 and the prices received index was up from 1.76 to 2.09. We mentioned the recovery has room to run because usually, a high ISM PMI reading is bad news. That’s because there is little room to improve from it. Usually, it’s a terrible time to own cyclicals when the PMI is high because stocks start to price a slowdown. Investors sense the cycle can’t get any better.

This time is different because of the reopening and the massive stimulus. As you can see from the chart below, when the nominal ISM is this high, it signals bad news for the 30-year bond yield in the next year. The nominal ISM is the prices paid index combined with the ISM manufacturing PMI. The bottom right chart shows all instances of when the nominal reading got above 69. It’s now at 69.2.

The nominal ISM (avg. of ISM Mfg Index & Prices Paid Index) is at 69.2.

The highest level since May 2018.

Only 7% of the time have we been above 69 since ‘03, 15/216 months.

Historically on average, a cross >69 coincided with falling bond yields over the next 12 months. pic.twitter.com/6L3lVZ1SCY

— Julien Bittel, CFA (@BittelJulien) January 26, 2021