A contraction in U.S. manufacturing activity threatened to dent investor sentiment which had grown stronger following the European deal. But hopes of economic stimulus from the central bank lifted most of the benchmarks into the green. However, the Dow missed out on a closing in positive territory though it recouped the day’s losses.
The Dow Jones Industrial Average (DJI) slipped 0.1% to close slightly lower at 12,871.39. The Standard & Poor 500 (S&P 500) edged up 0.3% and finished yesterday’s trading session at 1,365.51. The tech-laden Nasdaq Composite Index gained 0.6% and ended at 2,951.23. The fear-gauge CBOE Volatility Index (VIX) dropped 1.6% and settled at 16.80. Consolidated volumes on the New York Stock Exchange, the American Stock Exchange and Nasdaq, were roughly 6.1 billion shares, well short of last year's daily average of 7.84 billion shares. Advancers outpaced the declining stocks on the NYSE; as for 69% of stocks that gained, 29% stocks closed lower.
The report that figured prominently in yesterday’s proceedings was the one on economic activity in the manufacturing sector by the Institute for Supply Management. According to the report: "The PMI registered 49.7 percent, a decrease of 3.8 percentage points from May's reading of 53.5 percent, indicating contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2 percent. The New Orders Index dropped 12.3 percentage points in June, registering 47.8 percent and indicating contraction in new orders for the first time since April 2009, when the New Orders Index registered 46.8 percent”. The figure was also below consensus estimates of 52%.
The ISM Manufacturing Index is based on surveys of 300 purchasing managers nationwide representing 20 industries regarding manufacturing activity. It's considered as the most important of all manufacturing indices. Therefore, movement in this index plays an instrumental role and investors do keep a keen eye on it. Thus, the lower-than-expected reading was sure to dent sentiment. But the larger concern was that economic activity in the manufacturing sector recorded its first contraction since July 2009.
Worried by the contraction in the manufacturing activity, benchmarks opened in the red and later swung between small gains and losses. The data seemed to have unnerved investors initially and threatened to wash out the positives carried over from Friday, sparked off by the “breakthrough” deal reached at the European Summit. However, but for the Dow, benchmarks made a rebound as many market onlookers grew hopeful about fresh economic stimulus by the central bank. It is now popularly believed that dismal economic readings will pave the way for the Federal Reserve to come up with new measures to bolster the economy.
Thus, hopes for economic stimulus helped benchmarks rebound from the day’s losses. However, industrials remained one of the biggest losers with the Industrial Select Sector SPDR (XLI) losing 0.9%. Among the declining stocks, Graco Inc. (NYSE:GGG), Deere & Company (NYSE:DE), AGCO Corporation (NYSE:AGCO), IDEX Corporation (NYSE:IEX), 3M Co (NYSE:MMM) and Terex Corporation (NYSE:TEX) lost 1.4%, 0.5%, 2.7%, 0.5%, 0.4% and 3.4%, respectively.
Staying with manufacturing, things were not bright on the European and Chinese front as well. Financial information services company Markit not only noted painted a gloomy picture of manufacturing activity in Europe, but it also warned about factories preparing for the worst. Chris Williamson, Chief Economist, Markit, said: "Companies are clearly preparing for worse to come, cutting back on both staff numbers and stocks of raw materials at the fastest rates for two-and-a-half years”. As for the manufacturing Purchasing Managers' Index (PMI) he commented: “The PMI suggests that the goods-producing sector contracted by around 1 percent in the second quarter, with this steep rate of decline looking set to accelerate further as we move into the second half of the year”. China too recorded a dip in ifactory activity and the HSBC Purchasing Managers' Index (PMI) was down to 48.2 after seasonal adjustments. The index is now at at its lowest since November 2011.
Coming back to the domestic arena, a report on construction spending was much more promising. The U.S. Census Bureau of the Department of Commerce reported that construction spending moved up 0.9% from the revised April estimate of $822.5 billion to a seasonally adjusted annual rate of $830.0 billion in May 2012. The increase was significantly higher than consensus estimates which had predicted a rise of 0.1%.