Federal Reserve in Focus as Price Pressures Mount
Price acceleration was broad-based. Manufacturing output prices recorded their sharpest monthly rise since September 2022, while services posted the highest increase in charges since April 2023. These moves, directly tied to tariffs on imported goods, pushed overall selling prices to levels not seen since August 2022—likely drawing fresh attention from the Federal Reserve. Input costs followed suit, with manufacturing seeing the fastest rise since August 2022 and services the steepest since June 2023.
Export Weakness and Labor Cuts Signal Underlying Fragility
Despite output gains, external demand remains weak. Exports fell for a second consecutive month, with services exports dropping at the fastest rate since early 2020, outside of pandemic periods. Employment also turned negative: services cut payrolls for the second time in four months, and manufacturing posted back-to-back declines. These data suggest firms are bracing for weaker forward demand and margin pressures.
Services Rebound Adds Support, But Demand Is Still Domestic-Led
The US Services PMI business activity index rose to 52.3, up from 50.8 in April. The uptick was driven mainly by stronger domestic orders as foreign sales weakened. Service sector confidence improved to a four-month high, supported by the temporary pause on new tariffs and improved growth prospects. Still, sentiment remains below the 2024 average due to persistent policy and price uncertainties.
Market Outlook: Bullish Short-Term, Inflation Risks Rising
The flash PMI data point to a short-term bullish outlook on US output, especially in manufacturing, fueled by inventory build-ups and stronger domestic orders. However, accelerating price pressures linked to tariffs raise the risk of inflationary headwinds, which could prompt tighter Fed policy. Traders should watch closely for the Fed’s response and final PMI data in early June.
