Improved Business Activity Casts Doubt Over Rate Cuts

• Businesses across the globe broadly enjoyed an improved performance this month with activity picking up in the United States and across parts of Asia and Europe, surveys showed on Thursday, giving central banks room to potentially defer cutting interest rates.
• Borrowing costs were raised following the COVID-19 pandemic to combat rampant inflation, but talk has now turned to how soon - and by how much - they will fall, particularly in countries where voters go to the polls this year. Elections are currently being held in India, the United States goes to the polls in November, and on Wednesday British Prime Minister Rishi Sunak called a national election for July 4.
• The global economy is likely to carry its solid momentum for the rest of the year and into 2025, defying earlier expectations of a slowdown, according to an April Reuters poll of economists who said stronger growth than forecast was more likely than weakness. U.S. business activity accelerated to the highest level in just over two years in May, suggesting that economic growth picked up half-way through the second quarter.
• S&P Global said on Thursday that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month. That was the highest level since April 2022 and followed a final reading of 51.3 in April.
• A reading above 50 indicates expansion in the private sector. Economists polled by Reuters had forecast the index little changed at 51.1. The increase was driven by the services sector, with the flash PMI rising to 54.8 from 51.3 in April. The manufacturing flash PMI inched up to 50.9 from 50.0.
• However, manufacturers reported a surge in prices for a range of inputs, suggesting that goods inflation could pick up in the months ahead, in a worrying sign for the Federal Reserve as it waits for more confidence inflation has resumed a downward path before commencing rate cuts.
• "The main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated by pre-pandemic standards in both sectors to suggest that the final mile down to the Federal Reserve's 2% target still seems elusive," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

(Source: Reuters)