Today’s reading of US flash purchasing managers’ indices for May showed a decline in all three of the metrics reported by S&P Global, fuelling continued fears that US and global economic growth conditions are souring.
The flash composite PMI for May fell to 53.8 from 56.0 in April, which was down 15 points from a year ago and the lowest reading in four months. The composite index was largely dragged lower by services, which fell to 53.5 from 55.6 in April, a substantial miss relative to the consensus expectation of 55.2 and another four-month low. The manufacturing PMI also dipped to 57.5 from 59.2, but it was virtually in line with the 57.7 print expected by analysts. In contrast to the cooling growth picture, the employment index rose 0.7 points to 56.3, the fastest pace in 13 months, suggesting that labour demand remains strong. Federal Reserve officials have openly voiced their desire to rein in domestic inflation by reducing labour demand, especially since job openings per worker are at an all-time-high. As a result, today’s report should keep the Fed on its march toward, and possibly beyond, neutral.
While May’s PMI report highlighted the weakening consumer demand picture in the US, and thus the reduced ability for firms to pass on their higher input costs to consumers, the fact that US employment demand continued to rise over May despite the suppression of businesses’ profit margins will keep the Fed locked into their aggressive hiking cycle.
The continued upward pressure on wages from still elevated labour demand and solid household balance sheets means the Fed will take little solace from the current weakening in consumer demand. Instead, today’s data release will merely confirm to policymakers that further action in the near-term is required in order to further destroy demand and thus bring down drivers of demand-side inflation and labour market pressures. While the steep near-term rate profile in the US was already the market’s base case, today’s PMI data accentuated that this path for rates would coincide with an already weakening growth outlook for the US economy. The cooling US growth outlook resulted in a weaker dollar, further haven buying in US Treasuries such that yields fell further, and an extension in the drawdown in US equity indices. Additionally, more so for FX and bond markets, signs that service providers struggled to increase consumer prices suggest core services CPI could start to come down in the next months, reducing the need for higher US rates further out and, in turn, the dollar’s carry appeal. This was seen in the slight dovish repricing in December 2022-dated money market instruments.
Dollar drops with front-end yields after May’s preliminary PMIs show growth conditions cooling in the US
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst