The United States, France, Germany, Japan, and the euro area will release their July manufacturing PMI data tonight, which covers all aspects of corporate procurement, production, circulation, and other elements. It is a crucial indicator of macroeconomic trends, with 50 being the tipping point that measures whether manufacturing is expanding or contracting.
The data released today is crucial and has investors paying special attention mainly because the June data showed a trend of an overall decline in Europe, America, and Asia, reflecting the general decline in global manufacturing demand. The June data triggered significant market concern about the increasing risk of a global recession, which could impact the stock markets and currencies of various countries. Let’s first take a look at the current trend in global PMIs.
The United States
Affected by the continuing impact of high inflation, the Fed has raised interest rates in the past six months to curb inflation’s erosion of consumer buying power. Still, it is challenging to fight manufacturers’ falling demand for commodities. Suppose the decrease in demand is too significant, there will be a considerable reduction in new orders and layoffs, thus plunging the economy into a recession. This is also the massive problem of record-high inflation facing the Fed, which is trying to control inflation through significant interest rate hikes while trying to avoid triggering a large-scale recession.
The US Manufacturing PMI data has declined over the past two months, reflecting a decline in economic activities as consumer spending cools off. The PMI print is now quite close to the 50 midpoints The US PMI slipped from 57.0 to 52.7 in June, the lowest level since August 2020. Sub-data shows the US economy is facing a decline in new orders and difficulties recruiting enterprises. Index orders fell by nearly 6 points from 49.2 in May. A sharp decrease followed before the print fell into a contraction range, the lowest since May 2020. The employment index fell into contraction, falling to 47.3 in June, down 2.3 points from May, the weakest data since August 2020.
The current expectations of the upcoming Fed interest rate hike, the increase in global risk aversion, and other factors continue to support the dollar’s strength. However, suppose the above figures in the July data do not improve. The decline of the US PMI may drag down the overall US GDP trend. Falling GDP data will create negative expectations about the US economic prospects and drag down the US dollar’s upward trend. Still, it may negatively impact the US stock market, which has recently rebounded.
Eurozone
The situation in the eurozone is worse than in the United States, with a final manufacturing PMI of 52.1 in June, the lowest since August 2020. The euro has depreciated recently, falling to the same level as the dollar’s price. The eurozone’s future is still grim and affected by geopolitical factors such as the Russo-Ukrainian War. The European markets have operated for a long time under negative interest rates. However, a spike in inflation has affected the prices of oil and gas, raw materials, food, and other commodities, which rose sharply, putting heavy pressure on consumers due to the high cost of living and manufacturers.
The ECB unexpectedly raised interest rates by 50 basis points at yesterday’s interest rate meeting, exceeding market expectations. As a result, deposit rates rose to zero, ending negative interest rates, which made the euro temporarily resume its upward momentum. Still, we cannot ignore the economic reaction after the interest rate hike, coupled with the high debt of some European countries. The sluggish economic outlook restricts the PACE of interest rate hikes at the ECB. If eurozone PMI data continues to be unsatisfactory, the euro’s rebound driven by expectations of more rate hikes may be limited. Suppose inflation remains unchecked and the risk of a recession in the eurozone’s economic outlook rises, then the euro’s depreciation may be irreversible in the future.
Asia
The PMI data from Asian countries have also shown a sluggish trend, with Japan’s manufacturing PMI falling from 53.3 to 52.7 in June, the lowest since February. South Korea’s June PMI fell to 51.3 for two consecutive months, slightly lower than 51.8 in May. India’s June PMI fell to 53.9, the lowest since September last year.
The latest CPI data released by major economies such as the United States and Europe have not shown a clear shift in inflation trends. On the contrary, the market’s expectations for central banks to raise interest rates are still rising, especially the European Central Bank, which raised interest rates sharply for the first time in ten years and the Federal Reserve, which needs to cope with the sharp increase in the US CPI in June. As a result, many expect the Fed and the European Central Bank’s policies to further inhibit the expansion of demand in the manufacturing industry.
Therefore, it is expected that the PMI data from various countries in July will still not be ideal. Suppose the July PMI data continues to decline and approach the dividing line of 50. In that case, it will harm the confidence of investors in the affected countries, which will be detrimental to the prospects of global stock markets, as recession fears may once again dominate the market. In such a situation, the investment capital in many countries may flow into the US dollar as a hedge against inflation, which will continue to support the US dollar for a while. Still, if the US economic data does not improve, it will offset some of the US dollar’s recent gains. The ECB’s subsequent interest rate hike decision and the euro area economic data decision will permanently restrict the euro’s exchange rate against the US dollar.
