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US dollar softens after weak US business activity data increases recession chance


US PMI KEY POINTS:

  • US composite PMI fell to 51.2 in June from 53.6 in May, reaching a five-month low
  • Flash Services Business activity at 51.6 from 53.4 previously, also a five month low. Meanwhile, the PMI for manufacturing drops to 52.4 from 57 one month ago, the worst reading in 23 months.
  • Anemic growth indicates that the US economy did not recover significantly in the second quarter and that a recession may be around the corner

Most read: EUR / USD tanks as shocking PMIs point to rising recession risks

USA economic activity continued to slow down at the end of the second quarter, weighed by sky high price pressure and weakening question conditions. According to S&P Global, its Flash Compound Purchasing Managers Indexcombining manufacturing and service production data, dropped to 51.2 in June of 53.6 last month, reaches its lowest point since the beginning of the year when the omicron variant brought the recovery to a halt. Any figure above 50 signals expansion while readings below that level indicate contraction.

Looking at the internals, the services PMI fell to 51.6 from 53.4 in May, disappointing expectations that required a modest increase to 53.5. Manufacturing PMI, in turn, fell to a 23-month low of 52.4 from 57, well below consensus forecasts (see below).

techlives ECONOMIC CALENDAR

Source: techlives Calendar

Although both the manufacturing and services sectors have managed to grow this month, the pace of expansion has slowed dramatically, raising serious concerns about the health of the economy and the possibility of a recession in the medium term.

The US dollar, measured against the DXY index, wiped out gains and briefly moved into the area after S&P Global Purchasing Managers’ Index data crossed the threads, deepening the decline of recent days. This reversal coincided with a pullback in U.S. treasury rates, with the 2-year yield and 10-year yield trading at 2.95% and 3.04% respectively, with about 50 basis points from their cycle peak last week.

Although expectations may change, returns have priced lower on concerns that the US economy may be heading for a downturn stricter financial conditions.The Fed waited too long to begin removing accommodation to address lush inflation and is now trying to preload rate hikes in the most aggressive moves since Paul Volcker led the bank in the 1980s, increase the probability of a self-induced crisis.

US DOLLAR REACTION

US Dollar Index Chart

Source: TradingView

Concerns have risen after Fed Chairman Powell acknowledged that the FOMC is powerful actions could cause a recessionsays such a scenario is possible and characterizes a soft landing as “very challenging” in the current environment. It comes as no surprise then that the market has begun to scale down bets on future monetary tightening. Traders, for example, are now pricing a terminal rate of 3.41% for next year according to Fed Funds futures contracts, down from 4.15% a week ago, a reversal of 74 bp in less than 10 days.

Fed Funds Futures Implied Rate (May 2023)

US dollar softens after weak US business activity data increases recession chance

Source: TradingView

Today’s PMI reports confirm that US economic activity is declining rapidly. This situation could prompt investors to bet that the Fed will cut back and not live up to its promise to forcefully raise borrowing costs after 2022, paving the way for US yields to move lower. This scenario could undermine the US dollar in the coming months as long as panic and extreme risk-sentiment do not erupt in financial markets.

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— Written by Diego Colman, market strategist for techlives

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