US PMI undoes weeks of hawkish Fed talk

The US ISM Manufacturing PMI upset the past few weeks of upbeat hawkish US Federal Reserve (Fed) commentary last night.

Source: Bloomberg

The ISM fell back into contractionary territory at 49.4 in August from 52.6, its lowest level since February. The sub-components of the report were also unanimously weak, with the key components of New Orders and Output both pulling back into sub-50 contractionary territory at 49.1 and 49.6, respectively. With all eyes on Friday’s non-farm payrolls (NFP) report, the fact that the employment component also declined to 48.3 from 49.4 will not have been welcomed by US dollar bulls. The DXY US dollar index dropped roughly 0.4% to below the 95.60 level.

This has helped a resurgence in the dollar crosses. The Aussie dollar gained 0.5% and moved back above the US$0.7550 level. But the big gainer overnight was the pound. Cable, the GBP/USD rate, jumped 1% to trade above $1.3260 after the UK’s manufacturing PMI flew back into expansionary territory at 53.3 from 48.3 the previous month. There is a sense that UK manufacturers may be getting back to business as usual after putting things on hold in the direct wake of Brexit. A slew of economic data has surprised to the upside of late and Citi’s UK economic surprise index is tracking at the highest levels in a number of years. Conversely, this is not good news for the FTSE, which lost 0.5% overnight, given that its post-Brexit rally has been underpinned by the benefit to exporters from the lower pound and the expectations for further monetary easing from Bank of England.

The oil price continued its dramatic reversal overnight as WTI oil lost another 2.7% as the market continued to react poorly to the big increase in US EIA inventories yesterday and as hopes for a deal at the OPEC meeting continue to dissipate.

Many of these macro-factors were at play in the S&P 500’s flat session overnight. The concerns about the health of the US economy weighed on a number of sectors. But the weaker data read impacted rate hike expectations, which saw US financials have a tough session. While the further decline in the oil price saw energy stocks take another beating.

Asian stocks look set for another weak session, but volumes are likely to be relatively low with most traders wary of the major non-farm payrolls risk event this evening.

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