US services PMI data disappointing, but too strong to write-off a June rate hike.
Markets were last week placed on high alert for US data that might confirm a departure from the recent ‘soft’ patch and support a case for the Fed to begin hiking interest rates as early as June. Core CPI, which is Janet Yellen’s preferred measure of inflation, returned to an upward trajectory on Friday, seemingly putting in place the final piece of the Fed’s rate hike puzzle. With financial markets – and possibly the FOMC – undecided as to whether the US economy could yet withstand a rate rise, all data in the coming weeks will be vital in building a case for votes in either direction. With this backdrop in mind, services PMI falling to 56.4 was unhelpful: the data set is disappointing and slightly ‘soft’ yet confirms solid growth and does contribute to the FOMC’s pre-requisite of ‘moderate’ growth. As a result, currency and fixed income traders are likely to abstain from taking new positions until the next big data, which is US GDP on Friday 29th.