Forget the Fed, Focus on ISM

Stock markets were pretty sanguine today despite being hit by trifecta of major economic data, the ADP employment pre-market, the ISM during the early morning trade and the FOMC decision before the close. The most significant and the most waited of all was the 2:15PM EST Fed announcement. Investors were anxiously waiting for Bernanke’s team to give hints of QE3. Surprisingly, they didn’t although there was a slight change in the language. Equity investors shrugged off the “bad” news. May be they are expecting “Super Mario to Save the Market” tomorrow.

From the economic standpoint, the more relevant data was July ISM. It missed economists’ estimates and was the second consecutive month of sub-50 reading. More ominously, the gap between New Orders and Inventory indices was negative for the first time since September last year. A negative reading is usually a precursor for a downturn in ISM. Last year’s negative readings (July and August) were exception mainly because the Fed embarked on QE2. Everyone is expecting the Fed to do again (QE3) in September. Bernanke may prep the market in his Jackson Hole speech like last year. If the Fed does not do QE3, for whatever reason, or even if it does but is ineffective, then the downward momentum in ISM may be unstoppable.