US S&P Global PMIs set to highlight worsening manufacturing sector in May

The S&P Global advanced May PMIs are expected to show a slight dip in the manufacturing sector.
Markets expect the Federal Reserve to cut rates in September by 25 bps.
EUR/USD keeps the trade in the area of three-year highs past 1.1500.

S&P Global will release the preliminary May Purchasing Managers’ Index (PMI) for the United States at 13:45 GMT on Thursday.

The report comprises three measures — the Manufacturing PMI, the Services PMI and the Composite PMI (a weighted blend of the two) — each calibrated so that readings above 50 denote expansion and those below 50 signal contraction. Published well ahead of many official statistics, these monthly snapshots assess everything from output and export trends to capacity utilization, employment and inventory levels, and are largely seen as reliable leading economic indicators.

In April, the Composite PMI edged lower to 50.6 from 51.2 in March, pointing to a loss of growth momentum in the private sector’s economic activity. In this period, the Services PMI declined to 50.8 from 51.4, while the Manufacturing PMI fell to 50.2 from 50.7. Assessing the survey’s findings, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that PMI data for April highlighted a marked slowing of business activity growth at the start of the second quarter, accompanied by a slump in optimism about the outlook. “At the same time, price pressures intensified, creating a headache for a central bank which is coming under increasing pressure to shore up a weakening economy just as inflation looks set to rise,” Williamson added.

What can we expect from the next S&P Global PMI report?

Market expectations suggest that PMI readings in May will change a little. The Services PMI is forecast to hold steady at 50.8 and Manufacturing PMI is seen ticking down to 50.1 from 50.2.

Previewing the PMI data, analysts at TD Securities said: “The flash PMIs for May might reflect some optimism in their responses following the recent trade-war détente between the US and China.”

“Note that the survey is conducted during the two middle weeks of the month. With that said, while we are projecting an increase in the services index to 52.0, we look for a decline in the Manufacturing PMI to contraction territory,” analysts added.

Economic Indicator

S&P Global Manufacturing PMI

The S&P Global Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The data is derived from surveys of senior executives at private-sector companies from the manufacturing sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity in the manufacturing sector is generally declining, which is seen as bearish for USD.

When will the March flash US S&P Global PMIs be released, and how could they affect EUR/USD?

The S&P Global Manufacturing, Services and Composite PMIs report will be released on Thursday at 13:45 GMT and is expected to show a marginal expansion in the US private sector’s business activity.

In case both PMIs come in above 52, the immediate market reaction could boost the US Dollar (USD). Conversely, the USD could come under renewed selling pressure if PMIs drop below 50 in May.

The underlying details of the PMI surveys could drive the USD’s valuation if headline readings arrive close to market estimates. In case the publication hints at a strengthening input inflation, investors could see that as a sign pointing to a Federal Reserve (Fed) policy hold in the upcoming meetings, or a hawkish revision to the interest rate projections in June’s revised Summary of Projections. In this scenario, the USD is likely to outperform its rivals in the near term. On the flip side, the USD could struggle to find demand and help EUR/USD push higher if the survey highlights a significant reduction in the private sector’s payrolls.

Eren Sengezer, European Session Lead Analyst at FXStreet, shared a brief overview of EUR/USD’s short-term technical outlook:

“The Relative Strength Index (RSI) indicator on the daily chart climbs toward 60 after spending the previous week below 50, reflecting a buildup of bullish momentum. Additionally, EUR/USD closed above the 20-day Simple Moving Average for the first time in two weeks on Tuesday.”

“On the upside, 1.1500 (static level, end-point of the January-April uptrend) aligns as a strong resistance level before 1.1575 (April 21 high) and 1.1670 (static level from October 2021). Looking south, supports could be spotted at 1.1200 (Fibonacci 23.6% retracement of the uptrend), 1.1120 (50-day SMA) and 1.1015-1.1000 (Fibonacci 38.2% retracement, round level).”

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

(This story was corrected on May 22 at 08:39 GMT to say in the first bullet point that advanced PMIs are for May, not April.)

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