Treasury Yields Fall, Dollar Weakens As Manufacturing Activity Gauge Contracts More Than Expected

The U.S. manufacturing activity barometer contracted more than expected in May, leading to a sharp retreat in Treasury yields at the start of the week.

After falling back into contraction in April, manufacturing activity continued to decline for the second consecutive month, according to the Institute for Supply Management (ISM) survey.

Yields on the benchmark 10-year Treasury bond fell by nine basis points to 4.41%, marking the third straight day of declines. Longer-dated yields also saw similar drops, with the 30-year yield retreating to 4.57%. This decline spurred a 0.9% rally in the iShares 20+ Year Treasury Bond ETF TLT.

As yields fell, the U.S. dollar index broadly weakened against peers. The Invesco DB USD Index Bullish Fund ETF UUP falling 0.4%.

Traders slightly increased wagers on a September rate cut, currently assigning a 59% chance. That’s up from Friday’s 55%, according to CME Group’s FedWatch toll.

April ISM Manufacturing PMI Report: Key Highlights

• The ISM Manufacturing PMI Index fell to 48.7% in May, a 0.5 percentage point decrease from April’s 49.2%, failing to meet economists’ forecast of 49.7%.
• The New Orders Index stayed in contraction at 45.4%, which is 3.7 percentage points lower than April's 49.1%.
• The Production Index recorded 50.2%, dropping by 1.1 percentage points from the previous month’s 51.3%.
• The Prices Index was 57%, a reduction of 3.9 percentage points from April’s 60.9%.
• The Backlog of Orders Index stood at 42.4%, down 3 percentage points from April's 45.4%.
• Meanwhile, the Employment Index increased to 51.1%, up 2.5 percentage points from April’s 48.6%.

The Economist’s Take

"Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions,” said Timothy Fiore, chair of the Institute for Supply Management.

These investments are being deferred, encompassing supplier order commitments, inventory building, and capital expenditures.

While production execution continued to expand, it remained flat compared to the previous month.

According to Fiore, suppliers maintain capacity, with improved lead times and less severe shortages.

Fiore indicated that 55% of manufacturing gross domestic product (GDP) contracted in May, an increase from 34 percent in April.

Now Read: Bank Of America Strategist Shifts To Bonds: Stock Sell-Off Prophecy On Benign Inflation Comes True

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