S&P Global PMIs set to show US economic expansion extended into October

The S&P Global preliminary PMIs for October are likely to show little variation from the September final readings.
The Federal Reserve will likely trim rates again in November, with PMIs having no significant impact on the decision.
Financial markets revolve around the potential outcome of the US presidential election.
EUR/USD is poised to extend its decline after breaking below 1.0800.

S&P Global will publish the preliminary estimates of the United States (US) Purchasing Managers Indexes (PMIs) for October on Thursday. The indexes result from surveys of the senior executives in the private sector. They are meant to indicate the overall health of an economy, providing insights into key economic drivers such as GDP, inflation, exports, capacity utilization, employment, and inventories.

S&P Global releases three indexes: The Manufacturing PMI, the Services PMI, and finally, the Composite PMI, which is a weighted average of the two sectors. Readings above 50 indicate that economic activity is expanding, while figures below it represent economic contraction. Such indexes are released every month in advance of other official figures, becoming a key leading indicator of the status of the economy.

According to the September final S&P Global Manufacturing PMI, “the sector moved deeper into contraction territory at the end of the third quarter of the year,” blaming such a result to weaker demand and political uncertainty related to the upcoming US election. The index resulted at 47.3, declining from 47.9 in August.

On the contrary, the PMI for services suggested that the sector’s output expanded, with the index printing at 55.2 in September. Despite easing from 55.7 in August, the Services PMI signalled a “market monthly increase in service sector output at the end of the third quarter, and one that was among the strongest in the past two-and-a-half years.”

As a result, the S&P Global Composite PMI posted 54.0 in September, down from 54.6 in August. The report, however, included a worrisome line: “Inflationary pressures strengthened,” with the increases in input costs and output prices hitting 12-month highs for the service sector and six-month highs for manufacturing.

What can we expect from the next S&P Global PMI report?

Financial markets anticipate a modest improvement in the flash Manufacturing PMI, foreseen at 47.5 in October. The services index is expected to print at 55, while the Composite PMI will likely show little variation from the September reading of 54.

A poor performance of the manufacturing sector would come as no surprise, and the expected uptick would likely neutralise concerns particularly if the Services PMI keeps indicating a solid expansion in the sector.

Overall, recessionary fears have receded, with the focus shifting to the upcoming presidential election and the potential impact of the outcome on the economy. Indeed, better-than-anticipated figures will boost optimism about the American economy and maintain the Federal Reserve (Fed) on the monetary loosening path.

The Fed trimmed the benchmark interest rate by 50 basis points (bps) in its September meeting, and market participants expected the central bank would continue cutting rates at an aggressive pace. However, signs of steady growth spooked away such concerns. Fed officials will likely deliver 25 bps cuts in November and December and will continue to do so in the year ahead. PMI figures should deliver an extremely disappointing surprise to trigger concerns and shift these expectations, which is quite an unlikely scenario.

When will the October flash US S&P Global PMIs be released, and how could they affect EUR/USD?

The S&P Global Manufacturing, Services and Composite PMIs report will be released on Thursday at 13:45 GMT and are expected to show manufacturing output is still in trouble while the service sector remains the strongest. Overall, the anticipated figures represent no significant variation from September final figures.

Ahead of the release, the US Dollar is the strongest currency among major ones, helped by a constant run to safety ahead of the US presidential election. The EUR/USD pair trades below the 1.0800 mark and at fresh multi-week lows. Given tepid European growth-related data, the Euro is among the weakest USD rivals. It is worth noting that the Eurozone PMIs will be released ahead of the US ones and will likely have a negative impact on the local currency.

From a technical perspective, Valeria Bednarik, FXStreet's Chief Analyst, says: “The EUR/USD pair bearish trend is quite evident in the daily chart, with technical indicators maintaining their firm downward slopes, despite being in oversold territory. Other than extreme readings, there are no signs of bearish exhaustion. Even further, the pair is developing below all its moving averages, which gain downward traction far above the current level, reflecting persistent selling interest.”

Bednarik adds: “The pair has an immediate support area at around 1.0750, where it posted several intraday highs and lows back in June and July. Once below it, the next natural support level comes at 1.0700, en route to the year’s low at 1.0601. Near-term resistance lies at around the 1.0840 figure, while a flat 200 Simple Moving Average (SMA) in the daily chart is the next relevant dynamic resistance, currently at around 1.0870.”

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Economic Indicator

S&P Global Manufacturing PMI

The S&P Global Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The data is derived from surveys of senior executives at private-sector companies from the manufacturing sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity in the manufacturing sector is generally declining, which is seen as bearish for USD.