News & analysis

Flash PMI data for the US improved across the board, with S&P Global’s measures of manufacturing, services, and the composite all beating expectations and September’s prints. Notably, all three indicators came in at or above 50, the rough threshold between contraction and expansion.

While this morning’s PMIs for the Eurozone and UK continued to point to weaker demand outlooks, with the eurozone report proving to be particularly concerning, the US looks wonderful in comparison following today’s goldilocks print. Not only did firms report stronger demand, leading to the quickest pace of total output growth in three months, that rebound didn’t translate to higher prices. Instead, firms reported that input cost inflation fell to its slowest pace in three years, adding that they subsequently passed on those cost savings to the end consumer in a bid to drive sales. This anecdotal evidence from the sampled firms in the PMI report can partly explain why US retail sales data continues to print well above expectations even as economists warn of slowing demand as excess savings have been depleted. For now, the PMI data mean that the US exceptionalism story remains intact. This has forced a retracement in 10-year yields back towards 5% after short covering yesterday led to a considerable drop, while the better prospective growth outlook in the US keeps the dollar supported near its strongest levels of the year.

Even though the steady uptrend that began in mid-July was broken earlier this month, today’s report highlights why it is still too early to turn bearish on the dollar even as resistance to its continued ascent begins to form.

While business activity improved across manufacturers and service providers in October, today’s report points to several key differences between the two. For one, the improvement in demand was more visible in the manufacturing sector, which saw a renewed increase in new orders, whereas the services industry saw its third consecutive decline in new business. Services firms cited higher interest rates and more challenging economic conditions as a reason for reduced order books, while some mentioned that it was leading to a pattern of smaller and less frequent new orders. This can partly explain why services firms decided to keep absorbing higher input costs, weighing on their profit margins, as services providers saw a notable slowdown in output price inflation.

Despite their shrinking order books, however, service providers did the bulk of the hiring, leading to a continued net increase in employment for the month. With a slight decrease in manufacturing jobs—the first in over three years—the overall pace of hiring slowed from September. Even so, we may still see a sizable increase in nonfarm payrolls next Friday considering that the US labour market added 336k jobs in September, which was roughly double the expected figure as well as the average monthly increase during the three years preceding the pandemic. While the job market has remained robust, anecdotal reports from firms add some context to the slower pace of hiring. Notably, many firms opted not to replace voluntary leavers, looking to save on costs in the face of an uncertain future outlook for demand.

All told, today’s PMI report is yet another piece of economic data that will provide the Fed with confidence that the US economy is veering towards a soft landing.

This stands in direct contrast to the eurozone PMIs this morning, which suggested there is a real risk that the ECB may have over-tightened policy, risking a more sinister economic downturn over the coming months. For the dollar, while the path back to its year-to-date highs and beyond has become more challenging–owing to a variety of factors such as improving Chinese data, a dovish Fed feedback loop on higher Treasury yields, and intervention by Asian central banks to dull dollar strength–today’s data highlights how the US exceptionalism narrative that has supported the dollar for much of this year has yet to fully run its course.

While in isolation this may not prove sufficient in taking the dollar to fresh highs, it certainly dispels rumours that the US economy is dramatically slowing in the fourth quarter, a dynamic that would merely pull forward the Fed’s easing cycle and the timeline for more sustained dollar depreciation.

US economic outperformance leads the dollar to retrace yesterday’s losses, but the DXY index still remains a percentage point away from its year-to-date high




Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst


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