US manufacturing remains robust, but jobs market stays subdued
The US manufacturing sector remains strong despite ongoing challenges in the jobs market, as demonstrated by the latest ISM manufacturing index reading of 54.6, which, while slightly below expectations, underscores solid growth in production. Per the full note source, this is reinforced by substantial investment in technology-related capital expenditures, indicating a robust outlook for manufacturing. However, the subdued job creation and moderate wage pressures raise concerns about overall economic strength, particularly as the Fed weighs rate hikes later this month. Market participants should remain vigilant as the current pricing implies a 25bp hike in September is still on the table.
What the desk is arguing
The desk suggests that the recent ISM manufacturing data points to a resilient sector contributing positively to economic growth, aided by tech investments. Per the full note source, the production index at 58.3 signals GDP growth near 3%, while employment metrics reflect ongoing job creation albeit at a slower pace.
The moderate December ISM reading, although softer than anticipated, does not detract from a general trend of expansion. Specifically, the new orders index decreased to 53.7, indicating potential headwinds ahead, while the prices paid component remains elevated at 71.1, suggesting persistent inflationary pressures that may influence Fed policy decisions.
Where it sits in our coverage
Our consensus target for the USD remains at 1.075, with a range from 1.04 to 1.12. Key firms contributing to this outlook include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns closely with jpmorgan, which anticipates a stronger dollar based on similar economic indicators, while diverging from bofa, which projects a more cautious approach reflected in its lower dollar target.
How other firms see it
Consensus among aligned firms like jpmorgan suggests confidence in USD strength as supported by manufacturing data. In contrast, bofa holds a bearish outlook due to concerns about job market stagnation affecting wider economic performance.
Watch USD/CAD as it senses the pulse of the dollar's strength amid these economic signals, as growth prospects and Fed actions interplay in shaping forex outcomes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US manufacturing remains resilient, offset by soft job creation.
- 02ISM manufacturing index at 54.6 indicates continued expansion.
- 03Elevated input costs may pose challenges to sustained growth.
- 04Potential Fed rate hike remains a key market focus.
Market implications
Traders should monitor the USD/CAD pair closely; a breach of key resistance at 1.08 could signal further strength for the dollar. Additionally, keep an eye on Fed communications ahead of the September meeting, as indications of tightening could boost USD positions.
Risks to this view
The primary risk to this thesis would be a significant slowdown in manufacturing growth or unanticipated deterioration in the jobs market, which might prompt the Fed to adopt a more dovish stance. A substantial drop in the ISM index below the pivotal 50 mark could destabilize bullish USD sentiment.
Older quick take Quick take Published 15:39 United States US manufacturing remains robust, but jobs market stays subdued Another firm ISM manufacturing index boosts confidence in the durability of the recovery in the sector, fuelled by the ongoing surge in tech-related capital expenditure. However, the economy continues to create limited numbers of jobs with wage pressures remaining remarkably benign US manufacturing is being fuelled by the ongoing surge in tech-related capital spending Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Knightley Chief International Economist, US In terms of today’s US data, the August ISM manufacturing index is a touch softer than expected at 54.6 in August, down from 55.6 (consensus 55.2). The 50 mark separates expansion from contraction: the further the index rises above 50, the faster the pace of growth, while readings below 50 indicate contraction, with lower values signalling a steeper decline.
In terms of the details, the production index remains in very strong growth territory at 58.3, historically consistent with GDP growth of close to 3%. New orders slipped to 53.7 from 56.7, the weakest reading since March, while employment moderated to 51.2 from 52.8, but remains clear of the 6M average of 49.6. In general, the activity metrics underscore the improvements seen in the manufacturing sector, which is in large part a consequence of the surge in tech related investment spending.
The downside is the prices paid component remains very firm at 71.1, indicating input costs, such as energy, commodities and semiconductors, continue to increase at a rapid pace. Overall, there is nothing in this report to moderate market pricing over a Federal Reserve rate hike later in the month - that currently stands at 16bp of a potential 25bp hike. US ISM output metrics versus YoY GDP growth Source: Macrobond, ING "> Source: Macrobond, ING Meanwhile, the July job opening numbers rose to 7271k from a significantly downwardly revised June print of 7182k (originally reported as 7359k).
However, this report is volatile and historically tracks the Indeed job posting website daily data. Today, the Indeed figures are consistent with job openings of around 7000k, which points to renewed moderation in job openings in coming months. Layoffs remain very low, but so too are the hiring numbers.
This low hire, low fire economy means the churn rate, as measured by the quits rate – the proportion of workers quitting to move to a new job – dipped back to just 1.9%. That level is historically consistent with sub-3% year-on-year wage growth. Given that the biggest cost input for corporate America is workers, this should mitigate higher costs elsewhere.
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