The Fed may not be done with interest rate hikes yet

Despite an increase to output in January the U.S. manufacturing industry has suffered from lower consumer demand as well as higher borrowing costs.

Stagnating US demand for diesel, and other middle distillates seems to be the result of slowing manufacturing activity. But other economic data – out this week – showed a resilient economy and job market, suggesting that the Fed could be more hawkish with interest rate hikes to cool inflation. As a rule of thumb, the expected economic slowdown after the hikes is set to weigh on oil demand in the world’s biggest economy.

The U.S. industrial output was unchanged in January, after dropping 0.6% and 1.0% respectively in November and December. said Wednesday. After two months of significant decreases, manufacturing output actually increased by 1.0%. In January, capacity utilization for manufacturing increased by 0.6 percent to 77.7%. This rate is 0.5 percentage points lower than its long term average.

In the face of uncertain economic prospects, the demand for goods has slowed over the past months. This has resulted in lower manufacturing activity. Input costs for manufacturers have also risen dramatically.

This week’s Philadelphia Fed’s Manufacturing Business Outlook Survey showed a sharp – and unexpected – decline in manufacturing output in the Mid-Atlantic region. The index for current activity fell from a reading of -8.9 last month to -24.3 this month—its sixth consecutive negative reading and the lowest reading since May 2020. The survey also showed that manufacturing firms are paying more for materials and charging less for their products—a sign that their margins have become under increased pressure.

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“The survey’s future indexes continued to suggest tempered expectations for growth over the next six months,” Philadelphia Fed said.

According to data The Institute of Supply Management reported that January saw a third month of contraction in the manufacturing sector, following 28 months of steady growth.

“The U.S. manufacturing sector again contracted, with the Manufacturing PMI at its lowest level since the coronavirus pandemic recovery began. With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the January composite index reading reflects companies slowing outputs to better match demand in the first half of 2023 and prepare for growth in the second half of the year,” said Timothy R. Fiore, Chair of the Institute for Supply Management Manufacturing Business Survey Committee.

While manufacturing is seeing softening demand, other indicators this week point to a strong American economy. This could give the Fed more ammunition for ending the rate hikes cycle higher, and keeping interest rates high longer.

U.S. inflation fell slightly, but it slowed down. This suggests that the Fed still needs to manage inflation, analysts state. The Producer Price Index, which measures final demand and is seasonally adjusted, increased by 0.7% in January. more than expected According to analysts, nearly one-third the increase in the index for final goods is attributable to higher gasoline prices.

On Wednesday, the U.S. retail sector saw a 3% increase in sales and 6.4% growth for the year. the fastest clip In nearly two years, a complete turnaround from the two-month slump. The number of jobless claims fell unexpectedly Last week’s data indicated that the labor market is still strong.

The market is now pricing in the possibility that the Fed will raise rates more frequently and for longer periods of time this year, given the persistent inflation and signs of a strong economy.

“There’s a good chance the Fed does more than the markets expect,” Bruce Kasman, chief economist for JPMorgan Chase, told Bloomberg.

Loretta Mester, Cleveland Fed’s President and Chief Executive Officer, said this week, “At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5 percent and hold it there for some time to be sufficiently restrictive to ensure that inflation is on a sustainable path back to 2 percent.”

According to Ed Moya (Senior Market Analyst, The Americas), OANDA, “A strong dollar could emerge following a steady flow of hawkish Fed speak and that should keep any oil price rallies capped.”

“It is going to be hard for oil to break out here until we see clear signs that China’s reopening is reaching the next level.”

By Tsvetana Paraskova for has more top reads

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