Chicago PMI warns USD bulls ahead of ISM & NFP

<p>Seven days after the April CPI release showed a upward nudge in core inflation crushed USD bears on the pretext that a 2015 rate hike […]</p>

Seven days after the April CPI release showed a upward nudge in core inflation crushed USD bears on the pretext that a 2015 rate hike is inevitable, this week’s figures remind us of the growth side of things. The six-point drop in today’s release of the May Chicago PMI to contraction territory at 46.2 doesn’t augur well for next week’s release of the national manufacturing ISM figures. Recall earlier in the year, the Chicago index plunged 14 pts to 45.8 in February—the lowest level since Jul 2009. The February fall was attributed to inclement weather conditions. But the decline failed to a mimic a similar drop in that month’s release of the manufacturing ISM, which fell only 0.6 pts.

Will this time may be different? Unlike in February when the manufacturing ISM was preceded by a January figure of 53.5, next week’s May release follows a lower 51.5 April figure (lowest since May 2013), from which a sub-50 decline is more likely. The market impact of such an occurrence will not be minimal, especially as it would be the first contraction since November 2012.

More leeway for the bull case

Optimists may hold that previous sharp declines in the Chicago PMI were usually followed by strong rebounds. But the generally positive correlation between the Chicago PMI and the manufacturing ISM will not be lost by the fact that impact of USD strength is greater than it was in February this year or the prior year.

Today’s downward revision in Q1 GDP to -0.7% could also be cheered by optimists as the contraction is nowhere near the -2.1% seen in Q1 2014, which was the result of inclement weather and cost-cutting by a partly shut US government. The argument goes that if US growth went on to rally by an impressive 4.6% and 5.0% in Q2 & Q3 last year, then surely it can mimic a similar performance this year following a more modest decline in Q1.

Don’t ignore USD and China effect

There are two problems with the above rationalisation: i) The 25% rise of the US dollar has had unambiguously negative impact on US growth as seen through the 43% rise in the trade deficit (to 7-year lows) and all export components of regional and national business surveys; ii) The growth buffer from the BRICs isn’t what it used to be. Faltering growth in China, recession in Brazil and currency issues in the rest of Asia have offset the demand element.

And if we were to compare the performance of the four major business surveys between Q1 2014 and Q1 2015, the difference argues for a stark deterioration in 2015.

Chicago Philly Fed May 29 2015


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