Manufacturing indices from Europe and the US spurred confidence that a broad recovery in growth is in the works, sending FX carry trades and equities higher and leading the US dollar and Japanese yen lower. Indeed, the US ISM manufacturing index rose more than anticipated to a nearly one-year high of 48.9 in July from 44.8, and a breakdown shows that the subcomponents of the report were even more impressive, as production, new orders, and new export orders showed a clear increase in growth, with the latter two hitting the highest levels since June and July 2007. While the employment component did increase as well, it signaled job losses for the twelfth straight month, and suggests that this Friday’s non-farm payrolls report will also indicate that employment levels fell yet again during July, albeit at a slower pace than in previous months.
Upcoming income and consumption data for the US is projected to reflect mixed signals on the economy. First, personal income in anticipated to fall by 1.0 percent for the month of June, which would mark the sharpest drop since August 2005. That said, past increases in income have been due purely to surging transfer payments, which include government benefits like unemployment, while wage and salary growth has fallen steadily (-1.1 percent in May from a year ago). Next, personal spending is forecasted to rise by 0.3 percent for the second straight month in June, but based on the steep declines we saw in consumer confidence during that period, this reading could be somewhat disappointing. If this is indeed the case, the US dollar could gain slightly on flight-to-safety. On the other hand, surprisingly strong results could hammer the currency even lower as carry trade demand rises.