The morning started off on the bright side with stocks higher (Trump de-escalating tariffs), and then The Chicago Fed National Activity Index (CFNAI) surged +0.18 in February (dramatically better than the -0.17 decline expected). This surge was driven by a big move in 'Production and Income'...
47 of the 85 monthly individual indicators made positive contributions, while 38 indicators affected the index negatively.
But all eyes were on S&P Global's preliminary March data for any signs of a rebound after December and January's plunge in Services.
The good news is that there was a bounce in Services from 51.0 to 54.3 (well above the 51.0 exp) - the 26th consecutive month above 50.
The bad news is that there was a sudden plunge in Manufacturing PMI into contraction (from 52.7 to 49.8 - below 50)...
Source: Bloomberg
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“A welcome upturn in service sector activity in March has helped propel stronger economic growth at the end of the first quarter. However, the survey data are indicative of the economy growing at an annualized 1.9% rate in March and just 1.5% over the quarter as a whole, pointing to a slowing of GDP growth compared to the end of 2024.
A little different from the 2% plus contraction in the economy that The Atlanta Fed model believes.
"Near-term risks also seem tilted to the downside. Growth is concentrated in the service sector as manufacturing fell back into decline after the frontrunning of tariffs had temporarily boosted factory output in the first two months of the year. Similarly, some of the March upturn in services was reportedly due to business picking up after adverse weather conditions had dampened activity across many states in January and February, which could prove a temporary bounce.
"Business confidence in the outlook has also darkened, souring further from the buoyant mood seen at the start of the year to one of the gloomiest readings seen over the past three years, largely caused by growing worries over negative impacts from recent policy initiatives from the new administration. Most widely cited were concerns about the impact of Federal spending cuts and tariffs.
"A key concern over tariffs is the impact on inflation, with the March survey indicating a further sharp rise in costs as suppliers pass tariff-related price hikes on to US companies. Firms' costs are now rising at the steepest rate for nearly two years, with factories increasingly passing these higher costs onto customers. Thankfully, from the Federal Reserve’s perspective, services inflation remains relatively subdued, but this reflects the need to keep prices low amid weak demand, which will harm profits."
For now, the market is watching the surge in Services (bond yields up) and ignoring the Manufacturing side of the economy./p>
