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Manufacturing PMI Rises but Stays in Contractionary Territory, US Dollar Pares Drop

Manufacturing PMI Rises but Stays in Contractionary Territory, US Dollar Pares Drop

Diego Colman, Contributing Strategist

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ISM MANUFACTURING KEY POINTS:

  • Manufacturing PMI rebounds modestly in February, rising to 47.7 versus 48.00 expected
  • Despite the directional improvement, the goods producing sector of the economy remains in contractionary territory
  • The U.S. dollar trims losses after survey’s results point to a sharp increase in the prices paid indicator
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A gauge of U.S. factory activity rebounded modestly in February but remained in contractionary territory for the fourth month in a row, a sign that the economic outlook remains challenging amid stubbornly high inflation and rapidly rising interest rates.

According to the Institute for Supply Management (ISM), manufacturing PMI edged higher to 47.7 in February from 47.4 at the start of the year, slightly below expectations calling for an advance to 48.0. For interpretation, any figure above 50 signals growth in the sector, while readings below that threshold denote a contraction in output.

Looking at the internals, the new orders component improved moderately, climbing to 47.00 from 42.5, but the production and employment indices worsened, sliding to 47.3 and 49.1, respectively from 48.00 and 50.6 in January. Meanwhile, the prices paid indicator surged to 51.3 from 44.5, indicating that costs burdens are starting to accelerate again, a negative development for the Fed.

ISM MANUFACTURING DATA AT A GLANCE

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Source: DailyFX Economic Calendar

Immediately after the data crossed the wires, the U.S. dollar, as measured by the DXY index, retraced session losses, bolstered by a jump in Treasury rates, with the 2-year yield briefly topping 4.90%, its highest level since 2007.

While the manufacturing sector has been in a recession since November of last year, the spike in prices paid suggests that inflation is likely to remain sticky over the coming months, raising the risks that the Fed could take its terminal rate higher in its efforts to restore price stability. This could mean a 50 basis points interest rate hike at the March FOMC meeting, a bullish catalyst for the U.S. dollar in the grand scheme of things.

US DOLLAR INDEX & TREASURY YIELDS CHART

Chart  Description automatically generated

Source: TradingView

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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