S&P Global PMIs Preview: US economic activity expected to expand at steady pace in May

FXStreet in Market News 12 391509

May 23, 2024 19:02

S&P Global PMIs are expected to indicate some loss of momentum in US economic activity in May.
Manufacturing and Services prints are seen almost unchanged this month.
EUR/USD remains on the back foot so far this week.

On Thursday, S&P Global will issue its flash estimates of the United States (US) Purchasing Managers Indexes (PMIs), a monthly survey of business activity. The survey is separated into services and manufacturing output and aggregated into a single statistic, the Composite PMI.

In April, economic activity in the US private sector contracted somewhat, with the S&P Global Composite PMI easing to 51.3, following a drop in manufacturing output to 50, while the services index slipped back to 51.3. All components, however, remained above the 50 threshold, the border between expansion and contraction.

From the press release: “Manufacturing production increased for the third consecutive month, albeit at the slowest pace in this sequence. With new orders down, output was often supported by work on previously received orders.”

With the US economy showing tepid signs of deceleration and the labour market cooling somewhat, market participants have been pencilling in the likelihood that the US Federal Reserve (Fed) might start reducing its Fed Funds Target Range (FFTR) in the next few months. However, sticky inflation continues to prompt caution regarding the potential timing of the commencement of the Fed’s easing programme, a view that has been further propped up by the equally prudent stance of many policymakers.

What can we expect from the next S&P Global PMI report?

The May S&P Global Manufacturing PMI is expected to be 50.0, unchanged from April’s figure, but still within the expansionary territory (>50). A similar outcome is forecast in terms of services production, with the index expected to print at 51.3, matching the previous month’s reading.

As long as the measurements are over 50.0, the impact of a decline should be minimal. However, a drop below the line that divides expansion and contraction might reinforce speculation about Fed rate reductions, most likely to begin at the September 18 meeting. Such a scenario could likely maintain the US Dollar (USD) under pressure, forcing the USD Index (DXY) to give away part of the weekly advance.

The opposite scenario, that is, a positive surprise, should underpin the Fed’s tighter-for-longer narrative, supporting a stronger Dollar and higher yields across the curve.

When will May flash US S&P Global PMIs be released and how could they affect EUR/USD?

The S&P Global PMI report will be issued on Thursday, May 23, at 13:45 GMT. So far, EUR/USD has been suffering the recovery in the Greenback and revisited the low-1.0800s after hitting fresh monthly peaks in levels just shy of 1.0900 the figure earlier in the month.

From the technical viewpoint, FXStreet’s Senior Analyst Pablo Piovano argues: “EUR/USD faces its initial up-barrier at the May peak of 1.0894 (May 6). The surpass of this region could prompt spot to embark on a potential visit to the March high of 1.0981 (March 8) seconded by the weekly top of 1.0998 (January 5, 2011), all followed by the psychological 1.1000 yardstick.”

Pablo adds: “On the downside, a sustainable breach of the key 200-day SMA at 1.0787 should shift the near-term outlook to bearish, allowing extra weakness to potentially retest the May low of 1.0649 (May 1) ahead of the 2024 bottom of 1.0601 (April 16).”

Economic Indicator

S&P Global Services PMI

The S&P Global Services Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US services sector. As the services sector dominates a large part of the economy, the Services PMI is an important indicator gauging the state of overall economic conditions. The data is derived from surveys of senior executives at private-sector companies from the services sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity among service providers is generally declining, which is seen as bearish for USD.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.