The US ISM Manufacturing index for July was 48.0, which is below the expected 49.5 and down from last month’s 49.0. Prices paid fell to 64.8, lower than the anticipated 70.0. Employment also dipped to 43.4, down from 45.0 last month.

New Orders and Production

New orders increased slightly to 47.1 from 46.4 in the previous month. Production improved to 51.4, up from 50.3 last month. Supplier deliveries dropped to 49.3 from 54.2 last month. Inventories decreased slightly to 48.9 from 49.2 last month. Customers’ inventories went down to 45.7 from 46.7 last month. Meanwhile, the backlog of orders rose to 46.8 from 44.3 last month. New exports were slightly lower at 46.1 compared to 46.3 last month. Imports increased to 47.6 from 47.4 last month.

Production and Prices Paid

Production and prices paid were the only parts above the 50.0 mark. The rest remained below this level. The July ISM manufacturing report showed a weaker than expected index at 48.0, indicating that the sector is in contraction. This marks the ninth straight month below the 50.0 threshold, a trend linked to economic slowdowns. We now need to focus on defensive strategies, as this data suggests a cooling economy is likely. The significant drop in the Prices Paid component to 64.8 is important. It indicates that inflationary pressures are easing more quickly than expected. The market is now pricing in a higher chance of a Fed rate cut before the end of 2025, with fed funds futures shifting right after the report’s release. Traders should think about positions that benefit from lower short-term interest rates, as this report gives the Federal Reserve more leeway to ease policy. The steep decline in employment to 43.4 is a concerning signal for the upcoming Non-Farm Payrolls report. The weak labor market outlook puts pressure on corporate earnings expectations, making call options on cyclical sectors like industrials and materials less appealing. We expect increased market volatility, with the VIX index rising from 14 to over 16. Purchasing protection through put options on broad market indices could be a wise strategy. After the data was released, the US dollar index fell as expectations for future rate hikes decreased compared to other central banks. At the same time, yields on the 2-year Treasury note, which reacts strongly to Fed policy, dropped by over 10 basis points to 4.75% as investors sought safety. This situation suggests trading opportunities in currency pairs against the dollar and supports a bullish outlook on government debt for bond traders. It’s also important to note some internal divergences in the report, like the rise in production to 51.4. This shows that while new demand is weak, some manufacturers are still working through backlogs built up during 2023-2024. Although this may create short-term fluctuations, the trends in new orders and employment are more crucial indicators for our strategy. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now