US PMI Composite Output (1): 52.4 (Dec: 55.4). 9-month low. US Services PMI Business Activity Index (2): 52.8 (Dec: 56.8). 9-month low. US Industrial Output Index (3: 50.2 (Dec: 47.7). 6-month high.
US Manufacturing PMI (4: 50.1 (Dec: 49.4). 7-month high. Data was collected from January 09 to 23. U.S. PMI survey data pointed to further growth in business activity in January, albeit at a moderate rate of growth from a 32-month high in December to signal a more modest pace of expansion. The return to growth in manufacturing for the first time in six months was accompanied by sustained, but slower, growth in the services sector.
Meanwhile, corporate expectations for output next year continued to run at a level not exceeded since May 2022, buoyed by optimism about new government policies, encouraging companies to hire employees at the fastest rate in two and a half years.
However, inflationary pressures intensified to a four-month high, with both input costs and selling prices rising at increasing rates in both manufacturing and services.
Changing activity levels reflected divergent demand conditions. While new business flows to the services sector remained strong, the rate of increase narrowed to a three-month low amid the first decline in external (export) orders since June. Particularly bad weather has reportedly weakened activity in some companies. If manufacturing activity continues to improve, it could contribute to broader economic growth, which in turn could lead to upward pressure on prices.
At the same time, manufacturers reported the first, albeit very modest, rise in new orders for seven months, reflecting improved domestic demand and a lower export order loss rate.
Market Reactions to US Flash Manufacturing PMI
The Spot Manufacturing PMI serves as a leading indicator for financial markets, providing insights into the direction of economic activity. Investors and traders interpreted the latest reading of 50.1, which indicates a shift from deflation to expansion, positively. Following the announcement, the US dollar saw a significant appreciation against major currencies. A PMI reading above 50 indicates that the manufacturing sector is expanding, which boosts investor confidence in general and could lead to increased demand for the dollar as a safe-haven currency.
Stock markets also reacted positively to the news. The positive PMI reading eased some concerns about a possible slowdown in economic growth, especially in the manufacturing sector, which was under pressure from various factors, including supply chain disruptions and rising production costs. Sectors sensitive to manufacturing activities, such as manufacturing and materials, saw gains in their share prices. Investors interpreted the data as a sign of stabilization in manufacturing, which could lead to stronger economic growth in the near future.
Moreover, the bond market responded to PMI data, with yields on US Treasuries rising. A positive PMI reading often raises expectations of economic growth, prompting investors to prefer equities over fixed-income securities. This shift in sentiment can lead to bonds being sold, causing yields to increase. The overall market dynamics reflect cautious optimism about the manufacturing landscape, suggesting that investors are starting to price the potential recovery.
Market participants are likely to interpret the positive PMI reading as a signal that the Fed may act to reduce inflationary pressures. If manufacturing activity continues to improve, it could contribute to broader economic growth, which in turn could lead to upward pressure on prices.
Expectations for the current month on the US Flash Manufacturing PMI
Looking ahead, market analysts have mixed expectations for the spot manufacturing PMI for the coming month. While the recent rise to 50.1 has sparked optimism, various factors may influence the trajectory of the manufacturing sector. Supply chain issues, labor shortages and inflationary pressures remain significant challenges that manufacturers must deal with. These ongoing issues could weaken potential gains in manufacturing activity, making it difficult to maintain the upward momentum seen in the latest report.
Moreover, consumer demand plays a crucial role in shaping manufacturing outcomes. If consumers continue to face economic headwinds, such as higher prices and interest rates, their purchasing power may decline, which could lead to lower demands on manufacturers. Analysts pay particular attention to consumer sentiment and spending patterns, which are critical to sustaining manufacturing growth. If consumer demand weakens, it could lead to a lower upcoming PMI reading.
As the economy shows signs of resilience, the central bank may feel less pressure to maintain accommodative policies and may consider scaling back asset purchases or raising interest rates earlier than previously expected.
However, while the latest PMI reading is encouraging, the Fed will also look at other economic indicators, such as employment data, consumer spending, and inflation rates, before making any policy changes. Analysts note that the central bank will remain data-driven, and that ongoing improvements in the manufacturing sector will need to be consistent before any major policy shifts occur. Investors will be closely watching the interaction between the manufacturing PMI and the Fed’s monetary policy in the coming months.
