US Flash PMIs much worse than expected

The flash reading of the US PMIs for August has fallen sharply with Manufacturing and Services both falling more than expected. The announcement adds to the growing list of data misses and disappointments in recent weeks. 

The Composite PMI falling to 55.4 have missed consensus forecasts of 58.3 by some way. Whilst the US economic recovery continues (readings above 50 indicate expansion), it is clear from the HIS Markit report that the pace of growth has slowed, to an 8 month low. The key factors being capacity pressure material shortages and the COVID-19 Delta variant, all contributing to drag on output expansion, especially in consumer-facing sectors.

The HIS Markit report shows a chart linking the PMIs to GDP. So lower PMI suggests that GDP outlook may need to be revised lower for Q3.

In a combination that is also not ideal, pricing pressures remain high in the US, with input costs rising markedly at one of the fastest paces on record, with supplier prices and wage bills an issue.

What does this mean?

Economic activity indicators are in decline whilst pricing pressures are near record levels. This will pose some slightly more difficult questions for the Federal Reserve to grapple with as they move towards tapering asset purchases. 

Real US bond yields are falling in reaction with those inflationary pressures elevated.

Less pressure on Fed to taper is arguably risk positive (which is counter-intuitive for what is negative data) as it is a dovish influence on the FOMC.  


Initial Market Reaction

US Treasury yields falling by around -0.5 basis points on the 10 year (to 1.260% from 1.265%), with USD also mixed (mild gains versus EUR, mild losses vs GBP). Gold initially moved +$5 higher but is now giving that move back.

It is also interesting to see US equity futures moving higher and commodity currencies (AUD, NZD and CAD) at session highs now.