News & Analysis

The first week of the World Cup has thrown up some surprises so far, with Japan beating Germany 2-1 just now. But the shocks haven’t been limited to the football pitch.

November’s flash PMIs today suggest that the economic contraction in the US is occurring at a faster rate than the eurozone, although it is unambiguously occurring from a higher base. S&P Global’s US purchasing managers’ survey showed the composite index crumble to 46.3, badly missing expectations as both manufacturing and services sub-indices pointed to contraction. This contrasts with the eurozone measure, which printed at 47.8 for the composite and 47.3 (vs. 47.6 in Europe)  and 48.6 (vs. 46.3 in Europe) for the manufacturing and service sectors. The bleak flash data point caused Treasury yields to drop on the day, as a substantial slowdown in the economy coupled with a softer inflation print in October suggests the Fed won’t have to take rates as high as initially expected.

The turnaround in Treasuries has added tailwinds to the earlier risk-on rally in global markets, forcing the broad dollar back towards its post-CPI lows.

Despite tighter financial conditions and elevated inflation weighing on demand conditions and prompting weaker output, the report had a silver lining, especially for the Federal Reserve. Firms reported that input cost inflation had softened for the sixth consecutive month, with lower prices in key inputs such as lumber, steel, plastic, and shipping reducing cost-push inflation pressures that were significant in the first half of the year. Lower input costs and weakened demand worked together to induce the slowest increase in selling prices in over two years, unlike in Europe where the passthrough to the consumer is occurring at a slower pace. On top of these developments, firms reported that supply chains had become more stable and consistent, a welcome development after the pandemic placed massive strain on global supply chains.

The inflation-related news adds further support to the trend seen in the latest official consumer price data from two weeks ago, which came in well below expectations and drove a dollar sell-off and risk asset rally.

In addition, the PMI report suggests that employment intentions are starting to cool, as seen in the recent trend lower in US JOLTS data. Even firms within the services sector that had until recently been more protected from the cooling in demand conditions reported reduced employment intentions, with most firms linking recent hires to filling long-held vacancies. Currently, most new hiring demand is for highly-skilled workers.

While market participants consider S&P Global’s PMI index to be less reliable than the survey collected by ISM, the latest data has acted merely in confirming the market’s prior disposition. For this reason, today’s PMI data has taken the dollar back to recent lows, erasing recent sessions of consolidation after the CPI-induced sell-off, as opposed to pushing the greenback to levels where USD shorts are being actively considered. Meanwhile, money markets slightly trimmed their expectations of the Fed’s terminal rate, dialling them back by 4-5bps.

Dollar falls back towards post-CPI lows as the decline in November’s flash PMIs confirm market priors of a less aggressive path for US interest rates



Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
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