ISM Prices Drop Most in Three Years, Cooling Inflation Signal

US manufacturing activity expanded at a slower pace in June. The ISM Manufacturing PMI dropped to 53.3 from 54.0, missing the 54.2 consensus forecast. ISM said a reading above 49.2 still signals expansion. New orders and production both eased from their May levels, pointing to a moderation after a strong second quarter.

Orders slipped to 56.0 from 56.8. Production fell to 52.2, the lowest since the start of the year. The employment index ticked up to 49.7 from 48.6, still below 50 for a 33rd consecutive month. That streak is the longest since the 2008-2009 financial crisis, the ISM data showed. Manufacturers are relying on productivity gains rather than broad-based hiring to meet demand, the report noted. ISM estimated that a PMI of 53.3 historically corresponds to annualized real GDP growth of roughly 2%.

The prices index delivered the report's most market-moving signal. It tumbled to 73.0 from 82.1, well under the 79.0 forecast. The 9.1-point decline was the largest monthly drop since July 2022, the ISM data showed. Falling oil costs in June are feeding through to manufacturers' input prices, according to the survey. The drop reinforces evidence that the second-quarter energy spike did not translate into sustained broad-based inflation.

For the forex market, the sharp drop in manufacturing costs reduces the odds of a Fed rate hike later this year. Traders now see a higher probability that the central bank can begin cutting rates before year-end. A more dovish Fed would pressure the dollar and lift risk-sensitive currencies. The EUR/USD pair could test resistance near 1.0900 if the dollar weakens further, traders said. They added that the euro's own inflation dynamics will also matter.