Effects of Key US Economic Data on Market Interest Rates

Last week, US retail sales data and the last Federal Reserve meeting minutes were released. This week, the US has no shortage of critical economic data, but investors’ focus is on the August manufacturing and services PMIs. July durable goods orders, the second quarter GDP correction, and the July PCE Price Index, a key inflation indicator. There is also an annual meeting of global central bank governors over the weekend after the schedule, which can be used to find clues about what global central banks will do to fight the record-high inflation using interest rate hikes.

The US Markit manufacturing, services and comprehensive PMIs all hit new two-year lows last month, indicating that the economic slowdown in the US driven by the continuous sharp interest rate hikes is spreading to more industries. In the July ISM-related PMI report, the sub-index was mixed, with the new orders index falling while the production and backlog orders index rose.

Markets expect the latest US manufacturing PMI data to slow another boom-bust line close to 50, given that last month’s figure was 52.2. If the August results are close to 50, it would indicate that manufacturing activity is still expanding, but activity is slowing. On the other hand, according to the US services PMI of 48.7 in July, if the August result is below 48.7, it would indicate that the overall US GDP growth is declining. 

This GDP contraction may reduce inflation while lowering expectations for a 75 basis point rate hike by the Fed in September. The current US data suggests the country is in the expansion range. Therefore, although the current economic environment shows a slowdown, it may not be as bad. This needs to be confirmed by more data releases to determine whether the Fed can raise interest rates by 50 or 75 basis points at its September meeting.

Investors will be looking to see whether there will be a correction in the US Q2 GDP, because the previous data was weaker than expected. As a result, the country recorded negative GDP growth for the second consecutive quarter, which is the technical definition of a recession. However, the debate is still raging as to whether there is an actual recession. Therefore, most investors are waiting for the upcoming data to determine if the United States is in an actual recession. Friday’s US July PCE price index will be the final print, given that recent data, including the CPI, have shown signs of slowing inflationary pressures, with the July CPI falling slightly to 8.5%. In addition, the lower level of the PMI indices mentioned above further worsened the situation, indicating that the decline in commodity prices is beginning to ease cost pressures across the board. 

If this week’s data suggests that the slowdown in the US economy is not as severe and inflation is likely to peak, the US dollar index is expected to remain at the 107 level and rise to the previous high of 109.28. Conversely, a slowdown in the economic data and a pullback in the PCE price index could trigger investor expectations for a rate hike by the Federal Reserve in September, with the US dollar index possibly falling back to its previous low of 104.69.

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