Purchasing managers’ indices (PMIs) have been sliding in recent months, albeit from elevated levels. After reaching a cyclical peak in September 2017, manufacturing PMI readings went sideways for a year before they started a downtrend. The latest reading represents an improvement on the previous month’s figure but this does not necessarily mean the series of lower readings are over.
US manufacturing activity accelerated in March, partially recovering February’s fall. According to the Institute of Supply Management (ISM) March survey, its Purchasing Managers Index recorded a reading of 55.3, up from February’s reading of 54.2 and above the market’s expected figure of 54.3.
The average reading since 1948 is 52.9, so the current reading is above the long-term average. US financial markets reacted by sending Treasury bond yields noticeably higher while expectations of looser monetary policy were trimmed a little. By the end of the day, 2-year Treasury bond yields were 7bps higher at 2.33%, 10-year yields had gained 9bps to 2.50% and 30-year yields were 8bps higher at 2.89%. In terms of US monetary policy, according to federal funds futures contracts, the probability of a rate change before the end of 2019 is quite high, unlike a month ago. After the report, futures prices implied a 60% chance of a rate cut at the December meeting of the FOMC, down from 65% at the end of the previous day.