The soft patch is over – the US National Manufacturing ISM index for June rose to 55.3 from 53.5 with gains in the production, new orders, and employment indices. This was a surprise, though slightly less so following yesterday’s strong Chicago PMI. That said, the release does buck the trend of the majority of the regional manufacturing surveys for June, and ought to be treated with a ‘degree of caution’ until we have some more corroborating evidence.
But evidence for a 2H11 pick up is slowly gathering momentum, with yesterday’s optimistic outlook from Japan’s Tankan survey adding to the sense that supply disruptions are falling away, and normality is being resumed. The prices paid component of the ISM also fell – echoing an earlier decline in the inflation expectations in the Final June Michigan consumer confidence index.
Rising activity and falling inflation expectations is a good mix for equity markets, and will likely see gains there resulting in higher yields on longer-dated US Treasury bonds. We would also expect a continuation of such trends to result in a ‘moving’ forward of expectations for the first Fed rate hike from ‘late’ 4Q2012, to something closer to the middle of next year.
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