Investors were hoping for guidance on rate liftoff timing from the Fed yesterday, but that was not to be the case. The Fed did not send an obvious signal in the July minutes about whether a rate increase is on the cards for September. But they did acknowledge that the timing for liftoff is getting closer.
There is a month of data left before the September announcement, and while the onus has been on the data to disappoint and therefore delay a rate hike, yesterday’s minutes suggest that U.S data needs to convince most Fed members that immediate tightening is required. Each U.S data point over the coming weeks becomes that more important and tomorrow’s flash PMI’s will be apart of the equation.
The Federal Reserve Bank of Philadelphia conducts its own survey of manufacturing conditions to gauge the health of the industry and their forecasts on items such as spending, hiring and investment. Forecasters have had a hard time trying to estimate how the manufacturing base will react as uncertain times have led to erratic estimates. The July index missed expectations with 5.7 reading, the lowest since March. A figure above 0 is considered to be improving conditions, but in this case the market anticipated an 11.9 Philly Fed manufacturing index.
The strong USD and a cautious American consumer have posted soft retail sales, which in turn have made manufacturers worsen their outlooks. Competition from abroad at lower prices helped by depreciating currencies have already taken a bite from exports and its a trend that will continue as long as the Federal Reserve maintains its intentions to raise interest rates this year.
China Manufacturing PMI to Show Devaluation was needed
The decision from the People’s Bank of China (PBOC) to devaluate the Yuan came as surprise due to the timing of the announcement, but the all-known fact is that the Chinese economy is slowing down and the government has tried various ways to stimulate it back into growth. The devaluation of the currency joins liquidity injections, deposit rate cuts and other measures that are intended to boost internal demand.
The advance manufacturing purchasing manager’s index (PMI) will be published on Thursday, August 20 at 9:45pm EDT. This is an important leading indicator that collects the ratings of more than 400 purchasing managers on business conditions. The third party Caixin Markit flash manufacturing PMI has shown a contraction since March with a 49.2 reading and while the number stayed close to the 50 mark, which is considered an expansion last month, it fell to 48.2 and was latter revised even lower to 47.8.
Existing conditions were adverse for the economy and signaled a further slowdown, which is what has prompted the Chinese government to intervene regardless of the political risk, as the U.S. has always been a critic of an undervalued Yuan. The central bank and the government are not done, as the measures will not be enough as the devaluation sent a powerful message but did not give Chinese exporters a major edge as competing nations were also hit by depreciation as faith in the emerging markets continues to erode.
European PMIs Still Reeling from Greek Agreement Headache
German and French flash manufacturing PMIs disappointed last month with slightly lower than anticipated surveys. France fell below 50 with a 49.6 reading after two consecutive months of breaking expectations. Germany is still above 50 with a 51.5 level but after the unexpected deterioration of German ZEW sentiment it seems that the aftershocks of the Greek debt crisis are still lingering. German investor sentiment has had five consecutive declines. Investors are still confident that Germany is doing all it can to keep the economy as the engine of European growth, but the current macro conditions don’t favor an optimistic view.
Global manufacturing events to watch this week:
Thursday, August 20
10:00am USD Philly Fed Manufacturing Index
9:45pm CNY Caixin Flash Manufacturing PMI
Friday, August 21
3:00am EUR French Flash Manufacturing PMI
3:30am EUR German Flash Manufacturing PMI
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar 
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