In July, US business activity saw its fastest growth in 27 months, according to S&P Global Flash PMI survey, marking a promising start to the third quarter. Despite this, disparities in growth became more apparent, with the services sector leading the expansion, while manufacturing output fell for the first time in six months. Employment growth slowed, and business confidence fell for the second straight month, partly due to growing political uncertainty ahead of the presidential election. Competitive pressures led to one of the slowest increases in prices for goods and services in four years, despite some renewed upward pressure on costs, with input prices rising at the highest rate in four months.
The U.S. S&P Global Flash Purchasing Managers’ Index composite output index rose from 54.8 in June to 55.0 in July, its highest level since April 2022. Output has been rising steadily over the past 18 months, with a marked acceleration in recent months after a slowdown in April. The services sector outperformed the manufacturing sector for the fourth month in a row, with the variance reaching its widest range since June of last year. While services expanded at their fastest rate since March 2022, manufacturing output fell for the first time since January.
Order book growth varied significantly between sectors. Overall, new work flows rose slightly, with a renewed decline in new orders at manufacturers. However, the overall rise was the second largest in the past 13 months due to faster inflows of new business at providers, which saw the biggest growth in more than a year.
Sentiment about output next year fell to a three-month low in July, falling below the survey’s long-term average. Uncertainty related to the presidential election and its potential policies negatively impacted sentiment, along with concerns about rising inflation and interest rates.
The impact of the US Purchasing Managers’ Index (PMI) on financial markets: stocks, bonds and currencies
The US services Purchasing Managers’ Index (PMI) significantly affects financial markets, including stocks, bonds, and currencies. Here’s a detailed look at how the Purchasing Managers’ Index (PMI) affects these markets:
Stocks
1. Investor sentiment: A higher-than-expected PMI indicates strong economic growth, which can boost investor confidence and push stock prices higher. Conversely, a falling PMI can signal an economic slowdown, leading to bearish sentiment and lower stock prices.
2. Sector Performance: Different sectors react differently to Purchasing Managers’ Index (PMI) data. For example, a strong services PMI could positively impact sectors such as retail, hospitality, and financial services, while a weak PMI could have the opposite effect.
Bonds
1. Interest rates: A strong PMI indicates the economy is growing, which could lead to higher inflation expectations. This could prompt the Federal Reserve to raise interest rates, causing bond prices to fall and yields to rise.
2. Credit markets: Improving economic conditions reflected in a rise in the Purchasing Managers’ Index (PMI) can reduce the perceived risk of corporate default, leading to a narrowing of credit spreads. Conversely, a lower PMI can widen credit spreads due to increased default risk.
Currencies
1. Value of the US dollar: A rise in the Purchasing Managers’ Index (PMI) usually strengthens the US dollar because it indicates economic resilience, which attracts foreign investment. Conversely, a lower PMI could weaken the dollar.
2. Forex pairs: The Purchasing Managers’ Index (PMI) affects currency pairs that include the US dollar. For example, a strong Purchasing Managers’ Index (PMI) for services in the United States could lead to a stronger US dollar against currencies such as the euro, Japanese yen, and British pound.
Analysis of the US services PMI in June
Employment rose for the first time in three months, recording the largest increase in nine months. The services sector saw the largest payroll increase in five months, reversing some earlier declines, while salaries in the manufacturing sector grew at the fastest rate in 21 months. Despite rising employment rates, backlogs increased for the first time since January, due to insufficient capacity compared to demand growth, especially in the services sector. Difficulties in providing labor continued to challenge recruitment efforts.
Selling price inflation fell to a five-month low in June, but remained above the pre-pandemic 10-year average in both manufacturing and services, indicating persistent price pressures. The rate of increase was notably low in the services sector, the lowest in four years, and the lowest in six months in the manufacturing sector. Input price inflation also slowed, indicating a moderate trend of deceleration in cost growth. Manufacturing costs were driven by higher raw material prices and longer delivery times for suppliers, while wage growth remained a significant cost driver in the services sector.
Comprehensive economic forecasts
1. GDP growth: The services PMI is a leading indicator of economic health. Consistently high PMI readings indicate strong GDP growth, while persistently low readings may indicate an impending recession.
2. Business investment: A high PMI can encourage companies to invest more in expansion, while a low PMI can lead to cautious spending and lower capital expenditures.
In summary, the US Services PMI is a critical economic indicator that provides insight into the health of the services sector, influencing investor sentiment and market movements across different asset classes.
