The US PMIs yesterday were much better than expected and they triggered a hawkish reaction in the markets with the USD rallying across the board, and the stock and bond markets falling.The market pricing has also changed a bit with the first rate cut seen in December and September standing at roughly 60% chance.
Taking a closer look though, the report shows solid growth without worrying signs on the inflation part (yet). Reading the report:
"US business activity growth accelerated sharply to its fastest for just over two years in May, according to provisional PMI survey data from S&P Global, signalling an improved economic performance midway through the second quarter. The service sector led the upturn, reporting the largest output rise for a year, but manufacturing also showed stronger growth."
"Although companies continued to report lower employment, the rate of job losses moderated amid improved business confidence for the year ahead and higher order book intakes. Both input costs and output prices meanwhile rose at faster rates, with manufacturing having taken over as the main source of price growth over the past two months."
"However, the overall rate of selling price inflation remained below the average seen over the past year."
The first part shows that the growth impulse is strong, which is a good thing in the big picture. The second part tells us that the labour market is easing but remains healthy.
The worrying part comes from the line saying that "manufacturing has taken over as the main source of price growth". The fast disinflation we've seen so far was due to goods deflation as services inflation moderated much more slowly. Some goods inflation though might be good news for the manufacturing sector which was battered by the monetary tightening.
That could be supportive for growth without a real problem for inflation IF the rate remains moderate, which seems to be the case given that the report further adds that "the overall rate of selling price inflation remained below the average seen over the past year".
Overall, I don't see it as bad news and I would argue that the market is likely to fade the reaction in the next days and go back into risk-on. One spot to watch will be the labour market as the divergence between the input and output price inflation could lead to more labour shedding as businesses cut costs.
