EURUSD Hangs at 1.08 After FED and Contracting Manufacturing
The US ISM manufacturing index fell from 48.5 to 46.8 points, marking the lowest level since November but the USD remained steady, with EURUSD around 1.08. This sector has also been in contraction in the last 2 years apart from March and employment also dropped to its lowest point in 4 years. This was after a dovish FED and a weak ADP employment report, but the USD didn’t mind much and has been stable.
US ISM Manufacturing for July 2024
ISM Manufacturing Index:
- July reading: 46.8 (below the expected 48.8)
- Previous month: 48.5
Component Indices:
- Prices Paid: 52.9 (up from 52.1)
- Employment: 43.4 (down from 49.3)
- New Orders: 47.4 (down from 49.3)
- Production: 45.9 (down from 48.5)
- Supplier Deliveries: 52.6 (up from 49.8)
- Inventories: 44.5 (down from 45.4)
- Backlog of Orders: 41.7 (unchanged from last month)
- New Export Orders: 49.0 (up from 48.8)
- Imports: 48.6 (slightly up from 48.5)
None of the US major manufacturing industries showed expansion last month, highlighting widespread economic weakness. Demand remains subdued as businesses are hesitant to invest in capital and inventories and expressed concerns about decreasing consumer spending, reductions in inventory, and uncertainty regarding economic outlooks. The Federal Reserve which is relying on the data for rate cuts, is closely monitoring whether this weakness spreads to the broader economy.
Market reactions indicate an expectation of more significant and rapid interest rate cuts. The Fed funds futures market suggests a 15% probability of a 0.50% cut by September while a 0.25% cut is fully priced in, with further cuts anticipated across the following meetings, extending through 2025. By June 2025, the FED rate cut pricing has increased to 168 basis points from 150 basis points earlier in the week. US 10-year bond yields have fallen below 4%, losing more than 10%. However, the US dollar, influenced by global factors, does not fully reflect these changes, with EUR/USD trading close to 1.08 but a downturn in the US economy would have severe global implications.
Comments in the ISM Manufacturing Report:
- Business is relatively flat — the same volume, but smaller orders.” [Chemical Products]
- “Demand continued to soften into the second half of the year. Supply chain pipelines and inventories remain full, reducing the need for overtime. Geopolitical issues between China and Taiwan as well as the election in November remain weighing concerns.” [Transportation Equipment]
- “Even though we are used to a seasonal reduction in business over the summer, consumer behavior is changing more than normal. Sales are lighter, and customer orders are coming in under forecasts. It seems consumers are starting to pull back on spending.” [Food, Beverage & Tobacco Products]
- “Availability of parts is good, with small exceptions of missing materials here and there. Ordering is still well below typical levels as we continue to burn down inventory of raw goods, with ‘normal’ ordering trends expected to return sometime in the second half of 2024.” [Computer & Electronic Products]
- “It seems that the economy is slowing down significantly. The number of sales calls received from new suppliers is increasing significantly. Our own order backlog is also diminishing. We are hoping for an increase in customer demand, or we will possibly need to make organizational changes.” [Machinery]
- “Unfortunately, our business is experiencing the sharpest decline in order levels in a year. We were well below our budget target in June; as a result, it was the first month this year that we had negative net income.” [Fabricated Metal Products]
- “Business is slowing, and we are taking cost actions.” [Electrical Equipment, Appliances & Components]
- “Some markets that are usually unwavering are showing weakness. Weather is the common factor, but only so much.” [Nonmetallic Mineral Products]
- “Our sales forecast for July and August are slow, but we’re making every attempt to remedy that situation. Our medical end-user customers continue to meet their forecasts, which is promising.” [Textile Mills]
- “Elevated financing costs have dampened demand for residential investment. This has reduced our need for component products and inventory.” [Wood Products]
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