US PMI Manufacturing dropped from 52.7 to 52.3 in July, a 24-month low. PMI Services dropped from 52.7 to 47.0, a 26-month low. PMI Composite dropped from 52.3 to 47.5, a 26-month low.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“The preliminary PMI data for July point to a worrying deterioration in the economy. Excluding pandemic lockdown months, output is falling at a rate not seen since 2009 amid the global financial crisis, with the survey data indicative of GDP falling at an annualised rate of approximately 1%. Manufacturing has stalled and the service sector’s rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook.
“An increased rate of order book deterioration, with backlogs of work dropping sharply in July, reflects an excess of operating capacity relative to demand growth and points to output across both manufacturing and services being cut back further in coming months unless demand revives. However, with companies’ expectations of future growth slumping to the lowest since the early days of the pandemic, any such revival is not being anticipated. Instead, firms are already reassessing their production and workforce needs, resulting in slower employment growth.
“Although supply constraints remained problematic, constraining economic activity, the weakening demand environment has helped to alleviate inflationary pressures. Average prices charged for goods and services consequently rose at a much reduced rate in July, the rate of inflation still running high by historical standards but now down to a 16-month low to provide some much needed good news amid the ongoing cost of living crisis.”
Full release here.
Fed to hike another 75bps again, some previews
Fed is widely expected to raise interest rates by 0.75% today, for the second time in a row, to bring the federal funds rate target rate to 2.25-2.50%. More tightening is expected afterwards, as most FOMC members believed that interest rates have enter into “restrictive” region to curb inflation, which is already at multi-decade high.
The questions are on the pace of tightening beyond the neutral range, its impact on economic activity, and risks of recession as a result. Fed Chair Jerome Powell will be grilled for these questions. But a concrete answer is unlikely for now. The next rate-setting meeting on September 21 is nearly two months away. Two sets of prices, jobs and activity data will be published during the time, and before the new economic projections. The situation is so uncertain for Powell to tell the markets anything meaningful.
Here are some previews on Fed:
As for market reaction, a major focus is on 10-year yield. It’s so far still sitting comfortably above a key support zone of 2.709 and 38.2% retracement of 1.343 to 3.483 at 2.665. There is prospect of a rebound to flatten the yield curve of 2-year (3.053%) to 10-year (2.787%). But a firm break below 2.709 could signal a flush into bonds, which could send 10-year yield towards 50% at 2.413, and below. That will threaten the curve of 3-month (2.507) to 10-year yield, which will be a big warning.