Composite PMI readings come out each month and represent a monthly snapshot on the health of the manufacturing and service economies. A reading above 50 is considered good and the underlying economy is experiencing growth. A <50 reading is noting a shrinking economy as measured by output, activity, and prices.
A look under the hood of the Composite PMI readings can also give insight into “output prices” as a proxy for inflationary trends. Again, something around a reading of 50 is considered “normal”. As can be seen in the charts below, output prices in the Eurozone, Australia, the UK, and here in the US of A spiked in early 2022 and have ALL COME DOWN A LOT. Tighter financial conditions, higher interest rate costs, and tougher credit conditions have brought down inflation. What was out-of-control 18 months ago is no longer so.
Put another way, the yields on longer-dated risk-free assets might be increasing but it is not due to inflation – it’s due to the technical USTreasury supply story Sean outlined last week. As for output prices, there’s not enough in this data to make the Fed hike again. Inflation is back under the speed limit and that’s a good thing for risk assets.
Source: EISI as of October 25, 2023
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