Yesterday it was PMI day in the Eurozone, United Kingdom, and the United States. The markets focused on ongoing strength – or, at signs that the recent economic growth remains in place.
As always, the U.S. ISM data was the most expected one. Because of its tight correlation with the equity markets, it tends to dominate headlines to the detriment of the PMI’s from other parts of the world.
July 2020 ISM Non-Manufacturing Report – The Good and the Bad Ones
The good part is that the headline number exceeded expectations. Coming out at 54.2 on 53.6 expectations, it shows a further expansion for the manufacturing sector in the United States.
As this is a survey, respondents mainly reflected a temporary optimism seen on the back of the economy reopening up. While some businesses report that orders start to pick up, some other ones complain about additional costs, having to implement a number of safeguards due to the coronavirus health crisis. Overall, the incoming orders are seen as slow and sharp differences exist within the sector – some businesses in certain niches perform better than others.
The worrying element of yesterdays’ report is the employment component. It came out at 44.3, showing still a contracting sector. Remember, when interpreting PMIs, the 50 level acts as the line in the sand – anything below the level shows contraction for the sector, anything above shows expansion.
The further the data is from the level, the bigger the impact.
On the other hand, it rose from the previous 42.1 in June but still shows a contracting labor market. Now, the manufacturing sector in the United States does not have a big impact on the US GDP, but it is a labor-intensive sector. This is particularly important in a week when market participants expect the ADP (i.e., private payrolls) and the NFP releases.
Other than that, the July data looks pretty solid. New export orders and the backlog of orders also entered the expansionary territory, bringing an optimistic note on future growth for the entire sector.
The USD did not react much to the news. In a way, this is the NFP week, and no one takes any chances on a Monday. It gained during the European session and then lost ground during the North-American session, following the stock market religiously.
Moving forward, the ADP and the ISM Non-Manufacturing will complete the preview of the NFP data on Friday. And, they will seal the USD’s fate in the first trading week of the month.