US March Manufacturing Activity Surprises with Expansion... Treasury Yields Surge on June Rate Cut Outlook Retreat (Update)

ISM March Manufacturing PMI 50.3... Expansion After 18 Months
Fed Rate Cut Retreat Expected
10-Year Treasury Yield Surges 13bp

US manufacturing activity in March revived with increases in production and new orders, entering an expansion phase for the first time in 1 year and 6 months. The stronger-than-expected rebound in manufacturing has led to speculation that the US Federal Reserve (Fed) will not rush to cut interest rates. As expectations for a rate cut shift from June to the second half of the year, Treasury yields are surging.

On the 1st (local time), the US Institute for Supply Management (ISM) announced that the manufacturing Purchasing Managers' Index (PMI) for March stood at 50.3. This not only exceeded the previous month's PMI of 47.8 but also surpassed experts' forecast of 48.5.

ISM conducts a monthly survey of 400 companies to assess manufacturing conditions and compiles the PMI. A reading above 50 indicates expansion, while below 50 signals contraction. This is the first time in 1 year and 6 months since September 2022 that the US manufacturing PMI compiled by ISM has entered expansion territory. Earlier, the US manufacturing PMI compiled by S&P Global had already entered expansion.

The ISM manufacturing employment index slightly rose from 45.9 in February to 47.4 in March. The new orders index increased from 49.2 to 51.4, entering expansion territory. The manufacturing prices index rose from 52.5 to 55.8.

Timothy Fiore, chairman of the ISM manufacturing survey committee, analyzed, "Demand is still in the early stages of recovery, and there are clear signs that conditions are improving. As companies re-enter expansion, production surged compared to January and February." He added, "Customer inventory levels declined at a faster pace in March, and companies reported ongoing inventory shortages among their customers. This is considered a positive factor for future new orders and production."

The expansion in US manufacturing activity increases the likelihood of an upward revision to first-quarter gross domestic product (GDP) growth. On the same day, the Federal Reserve Bank of Atlanta presented a 2.8% real GDP growth rate for the US in the first quarter through its 'GDP Now' model. This is a 0.5 percentage point increase from 2.3% three days earlier on the 29th of last month. Although GDP Now is not the official forecast of the Atlanta Fed, it is used as a reference for future economic trends.

With strong economic indicators repeatedly confirmed, such as the US ISM manufacturing entering expansion territory last month beyond expectations, there is speculation that the Fed's timing for rate cuts may be delayed. On the 29th of last month, when the February personal consumption expenditures (PCE) price index matched market expectations, Fed Chair Jerome Powell reaffirmed a cautious stance, stating that additional evidence of sustained inflation slowdown is needed.

While the market predominantly expects the Fed to cut rates in June, some investors have begun to withdraw their bets on June. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on that day priced in about a 58% chance that the Fed will cut rates by 0.25 percentage points at the June Federal Open Market Committee (FOMC) meeting, down from the 70% range a week earlier.

Treasury yields are surging. The US 10-year Treasury yield, a global benchmark for bond yields, rose 13 basis points (1bp = 0.01 percentage points) from the previous trading day to 4.32%, while the 2-year Treasury yield, which is sensitive to monetary policy, increased 8 basis points to around 4.7%.

Jose Torres, senior economist at Interactive Brokers, said, "Investors are moving in anticipation that the Fed may pivot to a more hawkish (monetary tightening-preferred) stance," adding, "The Fed's first rate cut could occur in the second half of this year."