USD took a beating after the latest Markit PMI service of business activity SHOCKED the market.
Markets have become accustomed to solid US data in recent weeks, one of the key factors behind recent USD outperformance.
That was not the case with today’s Markit PMI data. The US Services Business Activity Index fell to 49.4, well below the expected 53 and indicative that the US services sector has contracted thus far in February.
Manufacturing activity was also a disappointment, albeit not quite as bad, coming in at 50.8, below expectations for 51.5 and down from last month’s 51.9 reading. The composite metric, which combines service and manufacturing, slipped to 49.4.
According to Markit, the contraction in output was in part driven by a renewed decrease in new business across the service sector. New export orders (seen as a good leading indicator as to where the index is headed next) also fell as firms reported greater hesitancy among clients to place orders amid speculation regarding coronavirus.
Chris Williamson, Chief Business Economist at IHS Markit, said;
“Total new orders fell for the first time in over a decade. The deterioration in was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions. However, companies also reported increased caution in respect to spending due to worries about a wider economic slowdown and uncertainty ahead of the presidential election later this year.”
Williamson added that “the survey data are consistent with GDP growth slowing from just above 2% in January to a crawl of just 0.6% in February. However, the February survey also saw a notable upturn in business sentiment about the year ahead, reflecting widespread optimism that the current slowdown will prove short lived.”
Unsurprisingly, this shock drop in implied US business activity trigger a broad USD sell-off. Money market implied probability of a rate cut by the Fed in June this year rose to near 60% from 50% prior to the data.
EUR was the main beneficiary, with EURUSD shooting to fresh weekly highs above 1.0850. As a reminder, Eurozone PMI data this morning was solid. For the first time in a very long time Eurozone PMI data is actually better than US.
Havens were also in demand, however. Gold which had already been on the move higher caught another bid, as did US treasuries. After all, a drastic slowdown in the world’s largest economy is hardly good news for global risk assets.
For the whole week, the market narrative has been that USD is untouchable because the US economy is less exposed to the economic impact of coronavirus in China than the Eurozone, Japanese or Australasian economies.
This latest data from both the US and Eurozone puts a serious question mark on this assumption.
Looking forward, if the drop in US PMI survey data translates into weakness in the hard-economic data (i.e. weaker GDP growth) and the improvement in Eurozone data translates into an improvement in hard-eurozone data (i.e. stronger GDP growth), we could see a serious reversal in the fortunes of both EUR and USD.
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