US flash PMIs unlikely to play ball with Trumps easing demands

Trump Mixed things up at Davos on Thursday, outright saying he wants lower interest rates immediately and for global central bank to follow suit. You don’t need a degree in economics to see that this flies in the face of a strong US economy, which requires higher interest rates. And with Trump likely to try and strong arm the Fed into lower rates, we’re back onto the topic of Fed independence.

Wall Street took the usual step of seeing everything in the best light possible, whereas bond traders appeared more level-headed with their non-reaction to Trump's comments at Davos. Trump had already signalled the desire for lower rates before his return, and US data simply does not allow for the level of easing Trump wants without lighting a match under inflation. And inflationary pressures are already building, looking at December’s PMI reports.

• US services reached a 2.5-year high according to S&P global
• The ‘prices paid’ index reached a 2-year high according to the latest ISM services report
• Add into the mix strong employment data, the Fed would look very weak and lose all credibility if they were to succumb to Trump’s pressure with the data we’re currently seeing
• Another strong flash PMI report today seems likely, which will make Trump's demands harder for the Fed to deliver. 

So we can expect some very public strong-arming from Trump in the foreseeable future. But from what I can see, the data does not make room for lower rates, which should keep some level of support under yields and the US dollar for now. But that could change if Trump begins making a direct attack on the strength of the USD, which I suspect is only a matter of time.

Elsewhere, European composite PMIs remain in contraction, which makes the strong US PMI stand out like a sore thumb. Flash PMIs have already been released for Australia and Japan, neither of which make a clear case for the BOJ or RBA regarding rates with such low rates of growth.

Economic events in focus (AEDT)

• 14:00 – BOJ interest rate decision (+25bp expected, but times may vary)
• 17:30 – BOJ Press conference
• 19:00 – World Economic Forum Annual meeting
• 19:30 – DE flash manufacturing and services PMIs
• 20:00 – EU flash manufacturing and services PMIs
• 20:25 – UK flash manufacturing and services PMIs
• 01:45 – US flash manufacturing and services PMIs
• 02:00 – US consumer sentiment and inflation expectations (Michigan University)

Judo Bank flash PMIs for Australia

Australia’s economy grew slightly faster in January with the composite PMI ticking higher to 50.3 from 50.2. Yet this rate of growth hardly screams expansion. Services growth was slower at 50.4, down from 50.8 whereas manufacturing is on the cup of expansion, with its contraction slowing to 48.8 from 47.8. These figures don’t really give the RBA much fire power to cut by themselves, and it remains debatable as to whether they really can cut in February as markets are pricing in.

But there are signs of inflationary pressures building, concerns of growth due to higher rates and slightly softer employment.

Observations from the report

• The opening month of the year also saw average input prices increase at an accelerated rate
• Output costs also rose as businesses passed their rising cost burdens on to clients
• Staffing levels across Australia’s private sector declined for a second successive month, albeit at a marginal rate for both sectors
• Some firms expressing concerns over elevated interest rates and inflation dampening growth in the next 12 months

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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