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Forex News – US January ISM Manufacturing PMI slides causing dollar to drop
February 4, 2014 1:18 pmVideo
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The release of the January ISM Manufacturing survey delivered a negative surprise both for risk assets and for the US dollar. Instead of backing off only slightly from December’s 56.5 figure, the index fell all the way to 51.3. Economists were expecting a drop to 56.0.
The reading was the lowest since May of 2013, when the index fell to 50.
The components of the survey also painted a negative picture. For example the employment sub-index dropped to 52.3 from 55.8, which could mean that manufacturers hired fewer people during January. This in turn could lower the number of new jobs reported in the nonfarm payrolls report on Friday.
The biggest drop however was in the new orders index, which fell from 64.4 in December to 51.2 in January. Although this component was still growing (above 50), the reduction shows a substantial slowdown for future manufacturing business.
Prices paid on the other hand shot higher as they reached 60.5 from 53.5 in the previous month. This was mainly the result of higher energy prices, which reflected one of the coldest months of January on record.
As a general comment, the extreme weather conditions that were observed during January were blamed for some of the slowdown. However, others saw the possibility that the manufacturing sector would slow down during the first half of the year, following a very strong second half last year.
How manufacturers will manage their inventories will be key for determining growth in the first half of 2014. Firms racked up inventories during the second half of 2013 and they will have to work at reducing those during the first half of the year.
To sum up, the ISM manufacturing was much lower than expected and this hurt the dollar – particularly against the yen. The weak figures prompted risk aversion as a weaker-than-anticipated US economy could force a rethink of the optimistic growth scenarios for 2014. If the weakness does not prove temporary and other statistics don’t provide a more optimistic story, this could have serious consequences. For the moment though, most investors expect that the US economy is broadly on track to deliver decent growth in 2014 and that the weakness may be related to the extreme weather that was witnessed during December and January. This statistic alone will probably not lead to a freeze in tapering by the Federal Reserve.
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