Yields Soar on ISM Data and Last Friday’s Economic Calendar

Rates close significantly higher after US manufacturing surprises to the upside. Friday’s mixed PCE data and hawkish commentary from Chair Powell sent rates4-7bps higher in the early-goings of today’s session.ISM manufacturing data, which expanded for the first time since September 2022, continued the trend. The jump to 50.3 in March from 47.8 in February spurred an immediate rise in rates, and rates closed 9-11bps higher. Fed Funds Futures now have ~67bps of cuts priced in this calendar year versus ~73bps as of last Thursday, while the odds of a rate cut in June dropped slightly but remain over 50%. Equities generally dropped on the manufacturing data and increased possibility for a patient Fed, with the Dow suffering a 0.60% loss on the session.

Friday’s PCE sends mixed messages, while Powell comments push yields up. Headline PCE was below estimates in February (0.3% act. vs. 0.4% est.) and under January’s upwardly revised 0.4% print. Though core PCE declined from 0.5% to 0.3% MoM, it was in-line with expectations. On a YoY basis, core PCE declined from 2.9% to 2.8%, while headline PCE climbed slightly from 2.4% to 2.5%, and both met expectations. Chair Powell’s comments on Friday showed that the Fed will likely maintain a patient approach, as he said, “The fact that the US economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates.” 

China joins the US with strong manufacturing data. China’s manufacturing PMI (50.8) broke above the 50.0 threshold in March, marking the first month of expansion since September 2023 and the highest level in a year.  Additional data released today showed that Caixin PMI (51.1) expanded for the fifth straight month, the longest such streak in two-years. The data offered optimism for the world’s second-largest economy, currently enduring a battle against diminished consumer demand. Meanwhile, last week’s export data provided hope that global demand is increasing, as exports in January-February rose 7.1% from last February versus the forecast of +1.9%.