The recent publication of the Institute of Supply Management (ISM) index in the US confirms that the manufacturing sector is struggling. The index dropped to 48.6 in the month of November compared to 50.1 the month before.  A reading below 50 has in the past been associated with a contraction in the manufacturing industry. In the Eurozone on the other hand the economic weather conditions are better. The Markit Purchasing Managers Index (PMI) for November stood at 52.8 which corresponds to an increase of 0.5 compared to the month before. The subseries for output, orders and employment all increased in November.

The black line in the following chart shows for the manufacturing sector the evolution of the difference between the ISM index and the Eurozone PMI index. The series has seen significant swings and since the middle of last year, there has been a noticeable improvement in the Eurozone compared to the US with the ISM eventually dropping below the PMI. Considering that the euro started to weaken against the US dollar in the spring of 2014, it is worth checking whether there is any relationship between the evolution of the EUR/USD exchange rate (the green line in the chart) and the difference between the ISM and the PMI.

chart4dec2015

Looking at both lines, one is struck by the close correlation since mid-2014 so this would indicate that euro weakness has given a boost to sentiment in the manufacturing sector with the opposite happening in the US in reaction to the strength of the dollar. Taking a longer perspective there have been other periods of close correlation (between 2001 and the end of 2003 things were relatively speaking improving in the US and the euro was strengthening and the same thing happened between 2007 and early 2008 as well as in 2009). Of course there have been exceptions and admittedly this is a very crude way of explaining the difference in cyclical momentum between the US and the Eurozone. What counts for the near term is that as of late, the correlation has been a close one and this may eventually impact the policy of the Federal Reserve by making them think twice about the speed of tightening.