· Event impact
US Inflation Pressure Persists with Hotter ISM Prices, Solid PMI
Transmission path
Stronger US activity and price data relative to expectations and other developed markets reinforces monetary policy divergence, supporting a stronger dollar and keeping upward pressure on the front end of the US yield curve.
Market mechanism
Stronger US activity and price data relative to expectations and other developed markets reinforces monetary policy divergence, supporting a stronger dollar and keeping upward pressure on the front end of the US yield curve.
Extended read
The latest round of US macro data paints a picture of resilient economic activity but persistent inflationary pressures. The May ISM Manufacturing report showed a headline reading of 53.3 and a Prices Paid component of 85.3, both ahead of forecasts. This suggests that the industrial side of the economy remains robust and input costs are still rising briskly. This data lands in a market already sensitive to inflation, with Fed officials like Governor Waller recently commenting on a backdrop of 3.3% annual Core PCE inflation. While some data points like construction spending show pockets of softness, the overall trend in key manufacturing gauges points towards a Fed that has little room to consider easing. The market impact is most visible in rate differentials. During May, the US 2-year Treasury yield climbed 13 basis points, while its German and UK counterparts fell significantly. This divergence is a primary driver for currency markets and will be a key focus for asset allocators.
Exposed assets
TLT · DXY · SPY
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