The intensity of the US dollar reaction to the PMI is instructive

This is a market that’s been desperately searching for signs of a cooling economy and it’s treating today’s S&P Global US PMI like an oasis in the desert.

It’s similar in FX, where we are getting a round of US dollar selling that’s lifted the euro by 40 pips and the pound by 60 pips.

I wrote yesterday about how I thought we had hit the point of maximum pain in bonds. We may get a better signal in today’s whopping $69 billion sale of 2s but with a 3 bps decline today, a sale at 5% is looking less likely.

The S&P Global services PMI doesn’t have a perfect record but it’s a forward-looking indicator and cracks the door open to some cooling in the economy — and the rate cuts the market wants with it.

The combination of the six-day rout in stocks and the pain trade all year long in bonds could mean a rapid re-evaluation of the path of the economy. Many forget that the US is running a deficit close to 7% of GDP. Once that’s removed in 2026 (depending on the election results), the economy will need lower rates to grow, similar to what we’re seeing elsewhere.

This article was written by Adam Button at www.forexlive.com.