Despite the recent slide in 'hard' macro data, analysts expected an incremental improvement in the preliminary April S&P Global PMI data this morning.

Consensus was right as both Services and Manufacturing surveys signaled an uptick in April

US business activity growth recovered slightly in April having slowed to near-stagnation in March following the outbreak of war in the Middle East. However, the overall pace of expansion remained subdued, most notably in the services economy where demand faltered.

Source: Bloomberg

“A rebound in business output growth in April is good news after the near-stagnation seen in March," but, warns Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

"...over the past three months we have seen the weakest expansion of output recorded since the start of 2024 with the war in the Middle East squarely to blame."

The April PMI is broadly consistent with the economy struggling to manage annualized growth in excess of 1%, with the vast service sector acting as the principal drag.

"Orders for services ranging from travel and tourism to financial products barely rose as the war caused hesitancy for spending among both household and business customers, with surging prices and the prospect of higher borrowing costs acting as a further deterrent."

There was better news from manufacturing:

"here an expansion of output and orders could be partly traced to the building of safety stocks, with survey respondents reporting “panic” and “emergency” buying ahead of price hikes and supply shortages in echoes of the problems seen during the pandemic.

While there is no prices paid (nor other subcomponents) released in the flash PMI, the market is looking for signs of inflation and margin pressures in the press release.

Prices paid have already picked up in the March ISM, although less so far in the PMI surveys.

And, as Williamson notes, not surprisingly, prices are already spiking higher in this environment, and not just for energy but for a wide variety of goods and services.

"The overall inflation picture is now the most worrying for almost four years."

Balancing the risks of inflation lifting sharply higher against the underlying weakness of economic growth presents policymakers at the Fed with a growing dilemma.

However, as Williamson concludes, it will likely be increasingly hard to make a case for rate cuts if inflation follows the path signalled by the PMI while the economy continues to eke out only modest growth.