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Durable Goods Weaken, Services Strengthen, Dollar Rebounds

Matt Eidinger September 5, 2019

The US dollar staged a modest rebound this morning after mixed data from the Census Bureau and the Institute for Supply Management (ISM).

According to the Census Bureau, new orders for manufactured durable goods rose 2% in July, representing a second consecutive month of growth.

A 7% surge in the volatile transportation equipment category drove much of the headline increase, but details below the hood weren’t as promising.

The primary metal category fell -1.2%, and fabricated metal products fell 0.9%- illustrating weaker demand for manufacturing inputs.

Machinery orders dropped nearly -2% overall, with a notable -6.4% decrease in farm machinery – one area that has been significantly affected by Chinese tariffs on US exports. Construction machinery, closely related to a slowing housing market, also fell, down -6.8% in the month.

Durable goods orders provide an important economic barometer, given that demand tends to fall for large-ticket items when consumers and businesses anticipate a slowdown ahead.

In contrast, ISM services data came in better than expected, registering a solid reading of 56.4 – representing the 121st consecutive month of growth. The New Orders Index registered 60.3 percent; 6.2 percentage points higher than the reading of 54.1 percent in July.

Except for the “Backlog of Orders” category, all sub-indexes indicated that the intangible sector remained firmly in expansion territory. Business activity and production rose 8.4 points, with 14 out of 16 industries citing improved sales. Wholesale trade declined in most major categories except inventories and prices paid – confirming the impact of the ongoing trade conflict on international commerce.

The Prices Index rose 1.7 percentage points from July, recording a 27th consecutive increase.

More worrisomely, the Employment Index fell 3.1 percentage points in August to 53.1 – the weakest print since 2017.

The greenback/loonie pair rose a modest 35 basis points after the release, reversing course from yesterday’s two-week low. In contrast, the Dollar Index was flat after this morning’s release.

A strong ISM non-manufacturing number will do little to lift the gloom settling over the American economy – growth in the services sector typically lags manufacturing, and today’s data add to growing evidence of a significant slowdown in US business confidence and investment. In light of this, money markets are currently pricing in a nearly 100% chance that the Federal Reserve moves to cut interest rates again in two weeks – and longer dated yields are under pressure.

With the cost of the trade war beginning to be borne on the home front, the dollar’s record of outperformance looks increasingly vulnerable.

Matthew Eidinger
Fintech Specialist, Dealing Operations

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