Weak US Manufacturing and Non-Manufacturing Data & Its Impact on the Market

Importance: The downward trend of the US ISM Non-Manufacturing data and continual contraction of the US manufacturing sector is vital in understanding how rising concerns about weak global growth and global trade tensions is impacting the US economy and by extension the labour market. Although recent US labour market figures showed unemployment rate reached new 50-year lows to 3.5% (vs. exp 3.7%), the flat wages growth number in the report signals that the US economic growth is still sluggish.

While the reading of the US ISM Non-Manufacturing PMI was at 52.6 (down from the expected 55.1), it isstill in expansionary territory since the figure is above 50. However, the number was the lowest measure since September 2016 and joins a string of negative data that has come out of the US this week, including poor manufacturing PMIs and private payrolls data. Although US Labour market data on Friday night indicated job growth has increased moderately in September, with a better than expected unemployment rate, monthly wages growth and manufacturing payroll declined for the first time in six months. The greenback gained some initial upward momentum from the labour market data, but continual pressure remains as the market prices in a greater chance of another Fed rate cut for October 30th FOMC meeting.

The disappointing US ISM Manufacturing PMI US 10-year also added to the market speculation about how much the Fed will cut rates this year. According to the ISM report, the gauge of US manufacturing slumped to the lowest level in more than 10 years in September.The PMI plunged to 47.8% in September from 49.1% in August, the weakest level since June 2009, and marks the second consecutive month of contraction. Despite a better non-farm payroll data than forecasted, the drop in ISM non-manufacturing and possibility of more market turbulence raises the chance that an October cut by the Fed may potentially materialise. The current implied probability of US interest rates to be 1.50-1.75% this month as priced in by the market is 76.4%.

Chart 1. US ISM Manufacturing at 47.8 in September
Chart 2. US ISM Non-Manufacturing edged lower to 52.6 in September