Drop in US ISM highlights the risks to the economy emanating from the manufacturing sector

The drop in the ISM to its lowest point since the subprime crisis highlights the risks to the economy emanating from the manufacturing sector. It's by no means an all-of-a-sudden move so it won't derail Fed plans for lift-off on 17Dec. But the manufacturing sector, along with housing and capex expenditures, are the three areas that need to be watched as the Fed marches toward rate normalization this year and next. Markets currently expect a tad less than 3 hikes by end-2016. 

The Fed's is not a willy-nilly approach. It wants to normalize rates slowly which means it must start before it otherwise would. This is risky but there's no way around it. If you're flying to Tokyo at half-speed and still need to be there by 6, you have to leave home twice as early. The trouble is, the Fed's target a 2% inflation rate isn't fixed like Tokyo is. 

If the Fed starts hiking too soon, Tokyo moves further away. It's a tough juggling act because most of us have forgotten how to solve systems of multi-variable differential equations. Put simply, starting early is tricky business. The Fed is going to have to play it by ear. 

"We don't think the data will weaken enough to push the Fed off course in 2016. But yesterday's drop in the ISM should give anyone pause", notes DBS Group Research.