Manufacturing Improves Again

The recent spate of better-than-expected US data continued yesterday with the ISM manufacturing reading for February printing a three year high at 60.8. This marked an extension from the prior month’s and expected 58.7 reading and marked the highest level since February 2018. The data, which comes on the back of several positive January readings, offers strong evidence of the continued recovery in the US economy.

Fiscal Boost

Notably, the improvement in last month’s factory sector performance comes despite the global semiconductor shortage which has come into sharp focus recently. The shortage has slowed down production at automobile plants and other manufacturers. However, with the economy receiving a boost recently from the $900 billion in stimulus agreed before Christmas, the recovery is making firm headway.

Consumer Demand Still High

Looking at the breakdown of the data, the uptick in manufacturing is being primarily driven by strong demand for electronic goods and furniture, Over the course of the pandemic, demand for these items has been increasing steadily with so many people forced to work from home as a result of the restrictions and lockdowns in place across parts of the US.

Producer Prices Surging Higher

One negative aspect, however, is that the pandemic has caused a sharp increase in supply chain costs. The index of prices paid by manufacturers for raw materials and components was seen rocketing higher to 86 last month the highest level since July 2008. The uptick in producer prices is adding to the rising US inflation expectations as traders speculate building price pressures will coincide with the reopening of the economy on a large scale over Q2 forward leading to a surge in consumer prices.

Inflation Expectations Rising

Last month, data showed that consumer’s inflation expectations had surged, with US treasury yields rising higher also. This has been consistent with a growing view in the market that inflation is likely to spike higher in the coming months, especially if the president’s $1.9 trillion stimulus plan is approved, with the risk that the Fed will be forced to removed easing ahead of schedule. While the Fed has publicly pushed back against this view, downplaying these fears, yields have been continuing to rise, suggesting that the market is not in agreeance with the central bank on this.

Technical Views

US10Y

The yield on the 10-year note spiked above the 1.50 level last week where it met selling interest and returned lower. Currently, yield is hovering around the 1.42 level, keeping the bull phase intact. While price holds above the 1.28 level, the focus is on a continuation of the current move, targeting the 1.68 level next.

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