It’s time to pile on another poor US fundamental release, this time in the manufacturing sector, one day removed from a sharp decline in the Empire Manufacturing Index.
Today, The Philadelphia Fed Manufacturing Index slid to -7.7 in June from 3.9 in May. This follows the index falling from 18.5 in April, and 43.4 in March and is the first contraction since last October. It’s also the biggest three month collapse in the history of the series according to zerohedge.com.
This continues to deterioration in the manufacturing sector overall. The supply disruptions as a result of the Japan earthquake can be blamed for part of this fall, but not all, which means the general slowdown in the economic recovery is growing more serious.
From the Release: “Responses to the Business Outlook Survey suggest that regional manufacturing activity weakened in June. The survey’s indicators for activity and new orders turned negative this month, while indicators for shipments and employment fell but remained slightly positive. Indicators for prices show a continuing trend of moderating price pressures. The broadest indicator of future activity fell sharply in June, recording its lowest reading in 31 months.
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 3.9 in May to -7.7, its first negative reading since last September. The demand for manufactured goods, as measured by the current new orders index, showed a similar decline: The index fell 13 points and recorded its first negative reading since last October. The current shipments index fell just 3 points but remained slightly positive. Firms reported declines in inventories and unfilled orders, and shorter delivery times.
Firms’ responses suggested little overall improvement in the labor market this month. The current employment index remained positive for the ninth consecutive month, but only 14 percent of the firms reported an increase in employment, while 10 percent reported a decline.
Indexes for prices paid and prices received declined from May and continue a trend of moderating price pressures in recent months. The prices paid index declined sharply, by 22 points this month.”
Figures on future expectations were sobering and can point to downward risks for the US recovery, even in the second half of the year.
“The future general activity index decreased 14 points this month and has now dropped 61 points over the last three months. The indexes for future new orders and shipments also declined, decreasing 9 and 14 points, respectively. The index for future employment fell 17 points and has declined 32 points in the last two months. Still, slightly more firms expect to increase employment over the next six months (21 percent) than expect to decrease employment (16 percent).”
The string of weaker data in the US has fed funds futures markets pricing in reduced expectations for a 1H 2012 rate hike.
From Dow Jones Newswire: “Fed-funds futures are in a holding pattern and still pricing in reduced expectations for a 1H 2012 funds rate hike after a negative reading on business activity from the Philadelphia Fed. July 2012 fed-funds contract, measuring expectations for late June’s FOMC meeting next year, prices in a 24% chance for the committee to lift the rate to 0.5% by then, unchanged from just before the data came in and Wednesday’s settlement.”
While the USD has enjoyed some strong gains on the back of “safe haven” flows, the Fed is still one of the central banks farthest away from raising rates, and a sharper slowdown in manufacturing will certainly add to that uncertainty.
Because of the events in Europe, US bonds saw increased interest prior to earlier data – jobless claims and housing starts – which came in a bit better than expected, but overall we have seen a move into Treasury’s with the 2-year yield hitting a record low.
From Marketwatch: Treasury prices pared gains early Thursday, after short-term yields were pushed to the lowest levels on record as confidence in the political will to address Greece’s groaning debt burden deteriorated and drove investors toward the traditional safe haven of U.S. debt.
Yields on 2-year notes fell to 0.30% in earlier U.S. action — setting a new low. The previous record was set in November, with 2-year yields touching 0.31% just after the Fed announced it would buy an additional $600 billion in Treasury bonds, a program that’s been dubbed “QE2.””
The S&P500 and Dow Jones Index were both higher however in NY morning trading and managed to extend that rebound following the release of the Philly Fed index. Higher North American equities added some sense of normalization in currency markets. Oil also turned higher on the day, though it remains close to 3-week lows.
Nick Nasad
Chief Market Analyst
FXTimes
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
