ISM Manufacturing PMI suggests peak manufacturing has been seen 

Economic data remains strong in the US, however, there are growing signs that the recovery growth of the sector is now beginning to slow down.

The PMI fell to 59.5 in July (from 60.6) which was at the bottom end of a range of analyst expectations, with the consensus sitting at 60.8. This was also the lowest reading since January.

According to Bloomberg, every component showed falling levels aside from the Employment and Backlog components. This would suggest that the growth rate in the sector appears to have peaked.

ISM Manufacturing components

Interestingly, the Prices Paid component (i.e. input prices) has fallen to a 4 month low and suggests that pricing pressure could now begin to ease. This will release some of the (negative) pressure on the Fed to tighten monetary policy (policymakers would much rather tighten policy due to strong growth rather than inflationary pressures).

ISM prices paid

In slightly more encouraging news, the Employment component is back above 50 (to 52.9) which bodes well ahead of Friday’s Nonfarm Payrolls data.

Ultimately, this ISM data helps to play into the concept that inflationary forces are transitory and will allow the Fed to be cautious with removing emergency stimulus. We now look ahead as to whether the ISM Services data reflects a similar picture on Wednesday.


Initial Market Reaction

Treasury yields are falling and markets are taking this as there is less pressure on the Fed to tighten monetary policy.

  • US 10 year Treasury yields -2.5 basis points
  • Gold has rallied +$5
  • EUR/USD has a lack of decisive reaction and if anything is ticking slightly USD positive.
  • S&P 500 futures + 5 ticks