Strong US Flash PMI buttresses case for higher interest rates

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The Flash Composite Purchasing Managers’ Index (PMI) for the US in February came in at 55.9, a two-year high. The Composite PMI is a measure of private sector activity in both the manufacturing and services sectors, and the Flash PMI is an advance estimate for the month. The chart has the US PMI data as well as that for the eurozone, which too was robust.

Chris Williamson, chief business economist at IHS Markit, said, “Price pressures have intensified further. Costs are rising at the steepest rate for four-and-a-half years in the service sector with a five-year high seen in manufacturing. Inflation therefore looks set to accelerate alongside the upturn in the economy, as higher costs are passed on to consumers.” Taken together with the big fiscal stimulus in the US and the Federal Reserve’s quantitative tightening programme, the stage has been set for higher interest rates.

For the eurozone, Williamson said, “Price pressures meanwhile remained elevated, in part because stronger demand has enabled more firms to raise their selling prices. However, some comfort can be gleaned from a slight easing in the overall rate of inflation compared to January’s recent high.”

The stock markets may see this in one of two ways: either look at the robust growth and see it as a glass half full; or focus instead on interest rates going higher and thus affecting stock valuations, making the glass half empty. For the bond markets, however, the message is negative—rates are going to go higher.

Needless to add, these global factors will affect the Indian markets too.livemint