Summary:

• US flash services PMI comes in at 56.9 vs 55.0 exp
• Manufacturing equivalent misses forecast with print of 52.5
• large short positioning in the USD could signal gains ahead

The main economic release from the US today has offered mixed messages on the US economy with the services PMI beating forecasts and the manufacturing disappointing. The flash data which is intended to be indicative of the current month gave a reading of 56.9 for the services PMI compared to a consensus forecast of 55.0 – the prior reading was also revised higher to 54.7 from 54.2 previously. 

Whilst these flash readings aren’t as widely followed as their ISM equivalents they do exhibit a fairly close correlation. As you can see from the chart below, today’s PMI services print has regularly under performed its ISM counterpart since the start of 2016. Therefore the positive surprise seen this afternoon could be seen to suggest that the next ISM reading will be strong and that the recent decline was a blip.

 US services PMI surprised to the upside today and could suggest that the recent weakness in the ISM readings isn’t too much of a concern. Source: XTB Macrobond

Whilst the services was a clear positive the manufacturing was something of a disappointment with a reading of 52.5 coming in below both the forecast 53.4 and the prior 53.3 (revised up from 53.2). This data point has been a near constant disappointment of late with now 6 of the last 7 releases coming in below the expected. Having said that, the scale of the misses remain relatively small and it is more likely a case of unrealistically raised elevations – perhaps due to the Trump administration’s claims to support this sector that have yet to yield much improvement – rather than a major weakness for this industry.

 Both the manufacturing PMI and the ISM equivalent have been a little disappointing of late. Today’s release has done little to alter this view. Source: XTB Macrobond 

The US dollar has been relatively subdued today with these latest data points failing to provide a clear catalyst for a significant move. Along these lines the latest positioning data may offer some food for thought. The unexpected Trump victory last November and the December rate hike from the Fed saw USD long positions swell and the subsequent depreciation of the buck is likely due in no small part to the unwinding of this. However, there is now a fairly sizable net short position amongst hedge funds and should something occur to cause these money managers to change their bearish view – which could happen as soon as this Friday should Yellen strike Hawkish tones at Jackson hole – then a rush to exit may spark a short-covering rally. 

 Hedge funds currently hold a sizable short position in the USD. This could be seen as a contrarian signal for price gains. Source: CFTC