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US Manufacturing Data Improves Further

James Boston
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US Manufacturing Data Improves Further

Markit Economics have just released the preliminary reading of the June Manufacturing Purchasing Managers Index (PMI) in the US. At a level of 57.5 this is showing further gradual improvement, last month’s final number was 56.4 and the market anticipated level this month was 56.5.

Just prior to the PMI release the Federal Reserve Bank of Chicago published it’s National Activity Index, this has swung from -0.15 in April to today’s May reading of 0.21, this index is traditionally a useful clue to the inflationary pressures present in the US economy.

Despite the recent rises in the Consumer Price Index, US markets are remaining calm towards the inflationary outlook for the economy. This is particularly evident in the Bond markets, the long end of the yield curve has slowed it’s rising pace and the gap between the medium and long dated bond yields is not expanding in any way that would suggest inflation taking hold.

This flattening yield curve is not suggesting that the US economic recovery is in jeopardy, growth is no doubt present and accelerating. A fairer interpretation of the current shape of the curve would be to suggest that the markets have faith in the authorities abilities to deliver growth while at the same time to do so in a manner that does not contribute to runaway price increases.

In fact the markets are exhibiting strong confidence that the Federal Reserve, under Janet Yellen’s stewardship, has substantial control over the US recovery. This is a leap of faith in an environment where monetary policy remains so loose and general price growth is accelerating. The Feds forward guidance is currently that policy will remain ‘accommodative’, i.e. loose, until six months after the end of it’s bond buying program. Since this program is not set to be fully wound up until November of this year it will therefore be Q2 next year before any rise in the Fed Target rate is seen. This will be a difficult stance to maintain if price growth activity continues to expand at it’s recent pace.

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