- The ISM Manufacturing PMI is the first hint towards the NFP, but the Prices component may steal the show.
- The US Dollar is well-positioned to take advantage of the outcome.
The Institute for Supply Management’s purchasing managers’ index for the manufacturing sector is published on Wednesday, May 1st, at 14:00. The first day of the month is Manufacturing PMI day all over the world and in the US, it also serves as the primary hint towards the Non-Farm Payrolls.
The headline figure stood at 59.3 points in March reflecting robust growth in the sector. Any score above 50 represents expansion and scores which are around 60 already forecast solid expectations among those surveyed by ISM. In April, expectations stand at 58.4 points a small, yet not insignificant drop.
A headline score of between 58 to 60 points would be within expectations and would leave the show to the Prices Paid component. A score above 60 would already provide further strength to the greenback. A fall to below 58 could weigh on the US Dollar.
Prices Paid Component
As mentioned, the Prices Paid component is set to play a broader role. Manufacturing is only a small part of the American economy. The services sector far outweighs the manufacturing one. Nevertheless, the Prices Paid component, which reflects costs for manufacturers, has an outsized impact on consumer prices, which are finally starting to rise.
The Federal Reserve has two mandates: full employment and price stability. On the employment front, the labor market continues growing at a solid pace, and the economy is nearing the target. On the other hand, inflation has been lagging and did not rise as models have suggested.
The CPI report for March showed a bump up in Core CPI from 1.8% to 2.1%. Is it sustainable? A rise in the Prices Paid component of the forward-looking PMI would help convince markets that consumer prices will continue picking up, thus justifying further hikes by the Fed and a stronger US Dollar. A fall in this component indicates a potential for moderation in prices and therefore a slower pace of rate hikes and a correction in the US Dollar’s strength.
Prices Paid stood at a whopping high level of 78.1 points in March and yet another increase to 78.3 is on the cards for April. As these are already sky-high figures, just holding onto 78 points would be good enough for the greenback, especially given current market conditions.
Favorable conditions for further USD gains
The US Dollar continues enjoying the back wind of high US bond yields as the benchmark 10-year Treasuries continue flirting around 3%. Also, the upbeat GDP figure of 2.3% and the optimistic views of Fed officials support the greenback.
Despite the favorable conditions, pullbacks, profit-taking, and corrections can also be seen. However, such corrections may be finished at the end of the month, when fund managers adjust their portfolios. On the first day of the month, such counter-trend movements may have already been completed, and the greenback may be ready for a green light to gain further.
All in all, it would take a significant disappointment in both the headline and the Prices Paid component to spoil the US Dollar domination.
More: USD keeps positive momentum ahead of key week