Weakest US Manufacturing Data In 10 Years Fuels Further Trade War Fears

Dollar Down Again

The USD was shunted sharply lower yesterday. This came following heightened concerns for the domestic economy thanks to the escalation of the trade war with China. The Manufacturing Purchasing Manager’s Index fell 2 index points to 50.5 in May. It hit its lowest level since September 2009. The IHS Markit data also showed the New Orders component of the index contracting for the first time since August 2009.

Manufacturing Down 6 Points over Last 12 Months

This latest drop in Manufacturing means that the index has now fallen 6 points since the highs of last year. According to respondents to the survey, client demand has fallen. This is due to customers delaying orders while they wait to access developing international factors given rising uncertainty about the outlook.

The IHS Markit data also showed new business from abroad having contracted at its fastest pace since Q2 2016. This marked the first fall since July 2018.

Employment Index Drops

Furthermore, the employment component of the index showed growth in that area was at its lowest level since Q1 2017. This weaker level was, reportedly, as a result of an increased level of churn due to a raised level of voluntary leavers and retirees.

Comments from IHS Markit

Commenting on the report, Chris Williamson, an economist at IHS Markit, said:

“May saw U.S. manufacturers endure the toughest month in nearly 10 years, with the headline PMI down to its lowest since the height of the global financial crisis… Both producers and their suppliers often reported the need to hold selling prices lower amid lackluster demand. While this bodes well for inflation, profit margins are clearly being squeezed as a result.”

US/China Trade Tensions Rise Again

This latest data will be particularly worrying to investors in light of the rising trade tensions between the US and China.

China released a paper this week blaming the US for the setbacks in trade negotiations. In the paper, China said that in order for them to reach a deal, “the US should remove all additional tariffs imposed on Chinese exports”.

The paper went on to say that China was willing to co-operate to agree to a “mutually beneficial and win-win agreement.” The Asian giant emphasized:

“One side should not cross the other’s ‘red lines’. The right to development cannot be sacrificed, still the less can sovereignty be undermined.”

The US Responds

The US responded this week with a statement of its own. The response accused China of “backpedaling”in talks echoing Trump’s own comments when he announced the increase in tariffs last month.

The statement, released by the Office of the United States Trade Representative said:

“Our negotiating positions have been consistent throughout these talks, and China backpedaled on important elements of what the parties had agreed to”.

The statement went on to say that the US was “disappointed” in seeing that China was attempting “to pursue a blame game misrepresenting the nature and history of trade negotiations between the two countries”.

Technical Perspective

The USD Index has fallen lower within the recent bullish channel. Bearish divergence in the RSI index over the last two months has warned of a potential reversal lower. For now, price is sitting on the 97.10 level support. While below here, the next support is the rising channel low, coming in around the early 96s before the next big structural level at 95.72. A break of this level could signal a broader shift in USD with the potential for a more extended downside run.