US purchasing managers’ indices (PMIs) have been sliding since August 2018, 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. Recent readings appear to have stabilised, albeit at sub-neutral levels. The latest reading marks a return to expansionary levels.
According to the latest Institute of Supply Management (ISM) survey, its Purchasing Managers Index recorded a reading of 50.9 in January, up from December’s final reading of 47.8 and more than the market’s expected figure of 48.4. The average reading since 1948 is 52.9 and any reading below 50 implies a contraction.
The ISM’s Tim Fiore said, “Global trade remains a cross-industry issue, but many respondents were positive for the first time in several months.”
US Treasury yields increased by modest amounts across the curve. By the end of the day, 2-year and 10-year Treasury bond yields had both gained 3bps to 1.35% and 1.53% respectively while the 30-year yield crept up 1bp to 2.01%.
In terms of likely US monetary policy, according to federal funds futures contracts the probability of a rate cut in the first half of 2020 remained small. The implied likelihood of a 25bps cut at the March meeting of the FOMC fell from 27% to 16% while a move in April declined from 44% to 37%. However, the likelihood of a cut jumps in the second half; prices at end of the day implied a rate cut at the FOMC’s July meeting to be 66%.