Following accelerated monetary tightening over the past two years, markets are searching for clues of when and by how much the Fed and other central banks will be pivoting towards looser policy.
Although the Purchasing Managers’ Index (PMI) may in general not alter the macroeconomic picture, at this juncture, they could prove helpful in gauging central bank trajectories later this year.
The PMIs indicate expanding economic activity when above 50 and signal contraction when below 50.
In particular, PMIs can help understand the state of inflation and highlight any emerging divergences between countries and regions.
These divergences can have an impact on currencies through rate trajectories and capital flows.
Stubborn inflation?
PMIs can give an indication of the inflation picture of an economy by reporting the trend in selling prices for goods and services.
Recent data shows that these selling prices have increased in the eurozone, UK, and Japan, fuelling doubts around the intended rate trajectories of monetary authorities.
For instance, if the downward inflation trajectory begins to see resistance, this could delay rate cuts and prove negative for market sentiment.
Later today, PMIs will be released for the US, UK, the eurozone as a whole, as well as Germany and France.
Australian and Japanese data was announced earlier in the session.
Consensus estimates
United States
In the US, December 2023 CPI data witnessed a rise to 3.4% YoY, coming in above the November 2023 reading of 3.1% YoY, and the 2023 low of 3.0% YoY.
As per TradingEconomics.com, the forecast for the composite PMI for January 2024 stands at 50.3.
This would be a moderation from 50.9 recorded in December 2023 when growth was driven by services PMI at 51.4 even as manufacturing experienced a significant decline to 47.9.
In the December report, cost pressures rose sharply for the manufacturing PMI while selling prices also surged higher.
On the other hand, the US Richmond Fed Manufacturing Index for January 2024 tumbled to (-)15, well below consensus estimates of around (-)7.
However, price movements in the survey were virtually unchanged from the quarter before.
Any surprise increases in the flash PMI may lead markets to expect further delays in cutting interest rates, which could be negatively perceived.
As per CME FedWatch data, a 48.1% probability of a rate cut has been priced in for March 2024.
Eurozone
Although Euro-area PMIs are expected to broadly rise in the release today, they are also expected to remain firmly in contractionary territory.
Following recessionary concerns, weakness in economic data and lackluster tourist activity, the composite index, services, and manufacturing PMI are expected to be below 50.
However, in the run-up to its meeting this week, the ECB has been steadfast in its intention to delay rate cuts as euro area inflation sped to 2.9% YoY in December 2023.
The European Commission reported that this was up sharply from 2.4% in November 2023, raising concerns among policymakers and market participants.
With expectations that the ECB will not be altering its policy rate during this week, attention will squarely be on the Bank’s forward guidance even as the market would like to see accelerated rate cuts from the current position of 4.5%.
The eurozone’s PMI could provide an important early indicator of whether the bloc could expect to see sustainably lower levels of inflation anytime soon.
If the ECB’s forward guidance is consistent with monetary authorities’ claims that interest rate cuts shall be delayed till the summer months, this could positively impact the strength of the euro.
There are concerns that the UK has already entered a technical recession owing to negative third-quarter GDP and tumbling retail sales data from last week.
Of particular importance will be the services PMI which has been central to business activity in the UK.
Consensus estimates expect this component to moderate from 53.4 last month to 53.2 in today’s release.
A strong services print could lead to an improvement in the current state of overall business sentiment.
The latest Business Confidence gauge from the Confederation of British Industry found that fourth-quarter sentiment plummeted to (-)15 from +6 in Q3 2023.
However, if the PMI is weaker than anticipated, this may further fuel concerns about the true economic situation of the UK and its growth prospects ahead.
Japan and Australia
Japanese data published earlier today showed composite PMI rising to 51.1 on the back of strong services activity, outperforming forecasts of a contraction.
In its monetary policy announcement yesterday, the Bank of Japan maintained the status quo on conducting ultraloose monetary policy.
Having said that, inflation has been elevated above the 2% target for 21 months in a row which may reinforce the need for tighter policy or raising the inflation targeting level.
Yet, a change is not anticipated in the near future given that rates stayed negative even at higher levels of inflation.
Australian composite PMI also improved but remained in contractionary territory at 48.1.
The manufacturing PMI entered the expansionary range, coming in at 50.3 in January 2024 as compared to forecasts of 48.4.
Interested readers can also check out our complete commentary on Japan and Australia.
Looking ahead
The PMI releases will be closely watched by market participants but are not expected to lead to a lasting change in macroeconomic assessments.
In relation to the significance of US numbers, analysts at ING noted,
The US S&P PMIs are usually less influential than their ISM counterparts, but large swings have seen markets react in the past. That said, for the upcoming releases consensus is looking for marginal changes only.