US S&P Global PMI expected to highlight steady economic growth in May

S&P Global will release the May flash Purchasing Managers’ Indices (PMIs) for most major economies, including the United States (US), on Thursday. These surveys of top private sector executives are seen as an early indicator of the country’s economic health.

Market participants anticipate that the Global Services PMI will print at 51, matching the April reading, while Global Manufacturing output is expected to print at 54, slightly below the previous month’s 54.5 reading. The Composite PMI, a combination of manufacturing and services data, stood at 51.7 in April.

S&P Global separately reports manufacturing activity and services activity through the Manufacturing PMI and the Services PMI. Additionally, they present a weighted combination of the two, the Composite PMI. Generally speaking, a reading of 50 or more indicates expansion, while readings below the threshold indicate contraction.

The report has two versions, a preliminary estimate and a final revision, which comes around two weeks later. These preliminary versions or flash estimates tend to have a broader impact on the US Dollar (USD).

What can we expect from the next S&P Global PMI report?

Ahead of the announcement, the USD holds on to substantial weekly gains, with the latest inflation data pointing to upcoming interest rate hikes. Overheating inflation, driven by the war in the Middle East, has established a new framework for central banks. The Federal Reserve (Fed) was expected to cut interest rates before the Iran war started, but as the conflict drags on, speculative interest has lifted bets on the central bank moving in the opposite direction.

The anticipated figures are expected to show that economic expansion continues at a moderate pace, which will likely help maintain the USD on a bullish path. Still, investors will be looking for additional clues in the employment and inflation sub-readings, both of which hint at how the Fed may react when it meets in June. A scenario in which mounting price pressures couple with a tight labor market would further support the case of upcoming rate hikes.

Higher rates have two immediate consequences. One, they would generate political turmoil, given US President Donald Trump’s continued pressure for lower rates. Two, it will also translate into higher borrowing costs, which means companies would be less willing to invest, hence slowing growth.

In the case of better-than-anticipated figures, the scenario will be pretty much the same: a bullish Greenback, supported by solid local data. A miss in PMIs, and worse, any reading below the 50 threshold, could put the USD under selling pressure. Still, the slide could well be short-lived, as demand for the safe-haven Greenback and bets of Fed’s hike are unlikely to be affected by the S&P Global report.

When will the May flash US S&P Global PMIs will be released and how could they affect EUR/USD?

The S&P Global Manufacturing, Services, and Composite PMIs reports will be released at 13:45 GMT on Thursday, and as previously noted, are expected to show that US business activity continued to expand in May.

Valeria Bednarik, FXStreet Chief Analyst, notes: “The EUR/USD pair struggles to recover above the 1.1600 mark, trading near a fresh multi-week low in the 1.1580 region. The USD pared its advance as Oil prices eased from weekly tops, hinting at reduced concerns about Middle East developments, but remains strong as the conflict seems far from over.”

Bednarik adds: “War headlines are likely to continue overshadowing macroeconomic releases, with the latest likely to have a temporary impact on price action. As for the EUR/USD pair, it is technically bearish. The daily chart shows that the Momentum indicator gains downward momentum below its midline, while the Relative Strength Index (RSI) indicator remains flat in oversold territory. At the same time, EUR/USD develops below all its moving averages, with the 20 Simple Moving Average (SMA) heading south while providing dynamic resistance around 1.1620. Gains beyond it could open the door for an advance towards the 1.1660 area, where sellers are likely to return.”

Finally, Bednarik notes: “A downward extension below recent lows in the 1.1580 region could favor a test of the 1.1530 area, while further slides expose a long-term static support area around 1.1470.”

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

Economic Indicator

S&P Global Composite PMI

The S&P Global Composite Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging US private-business activity in the manufacturing and services sector. The data is derived from surveys to senior executives. Each response is weighted according to the size of the company and its contribution to total manufacturing or services output accounted for by the sub-sector to which that company belongs. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the private economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity is generally declining, which is seen as bearish for USD.