February Surveys Confirm Our View of Present Conditions

This morning's releases of the services sector surveys by Markit Inc. (PMI Services Index) and the Institute for Supply Management (ISM Non-Manufacturing Index) essentially confirm what our macro analysis tells us about the current state of the U.S. economy.

That is -- on balance -- the economy is exhibiting real strength with attendant inflation pressures. 

We're looking ultimately at a shift in the macro regime that will now see bond and stock prices trending in opposite directions for a potentially extended period going forward. A period that will see the Fed appropriately nudging its policy rate higher. 

Click here for our view of how the stock/bond/interest rate relationship plays out over time:

PMI Services Index
Released On 3/5/2018 9:45:00 AM For Feb, 2018
Highlights

PMI services had shown softness compared to other small-sample surveys but strength is now accelerating. Driven by new orders, the PMI held on to its strong mid-month gains with a final score of 55.9 to match the February flash. This is up a very sharp 2.6 points from January.

Capacity stress is now appearing in the sample with backlog orders piling up for a third straight month to a nearly 3-year high. And prices are accelerating, especially input costs which are at a 2-1/2 year high and also selling prices which the report says continue to climb.

Hiring is solid and business optimism is also strong, at a 13-year high. Unsustainable strength is the signal from many private surveys, still in contrast to actual data from the government where strength is much less severe. Coming up at 10:00 a.m. ET is the ISM non-manufacturing survey which ran especially hot last month.

ISM Non-Mfg Index
Released On 3/5/2018 10:00:00 AM For Feb, 2018

Highlights

The ISM non-manufacturing index, at 59.5 in February, easily beats Econoday's consensus and follows this morning's services PMI to hint at accelerating and perhaps unsustainably strong conditions for the bulk of the nation's economy.

New orders in ISM's sample are pouring in at, at 64.8 with new export orders also unusually strong at 59.5. These are moving into backlogs which keep building, to 56.0
which is unusually strong for this reading.

Deliveries continue to lengthen and input prices, at 61.0, are clearly elevated. ISM's sample hired in the month but, at 55.0, the employment index is down sharply from January's 61.6 which does not point to rising strength for Friday's employment report.

Outside of employment, however, this report does in fact point to rising strength, perhaps more than the sample can handle without inflationary pressures accelerating

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