Brief: US Manufacturers' Two-Year Recovery & China's Retaliation

Mobius Intel Brief:

The ISM’s January Manufacturing Purchasing Managers’ Index showed sector expansion for the first time in 26 months, offering optimistic anecdotal support for the US industrial sector’s energy demand outlook. However, producers’ supply chain inflation provides a caveat to consider as US trade negotiations intensify.

Key Intel

• A Two Year Recovery: The ISM’s January headline PMI print of 50.9 was the first >50 reading since October 2022.

• Supply Chain Inflation: While the headline number supports this year’s industrial energy and raw material demand outlook, the ISM’s sub-index for manufacturers’ prices paid showed the sectors’ input price inflation grew for the fourth-consecutive month and at the fastest pace since May 2024.

• Moderate Upside Risks: President Trump’s tariffs on Canada and Mexico were paused for 30 days yesterday, easing some upside risks to early-2025 inflation. Still, an additional 10% tariff on imports from China will likely maintain upward pressure on manufacturers’ supply chain inflation.

• Tariff Retaliation: Retaliatory trade policies warrant monitoring as the Trump administration leverages US energy exports in trade negotiations. In line with this theme, China’s finance ministry announced retaliatory tariffs on several US goods today, including levies on US energy exports like LNG (15%), coal (15%), and crude (10%).

• Context: China imported an average of 255 kb/d of US crude and 614 million cubic feet per day (MMscfd) in the first eleven months of 2024. While effects on long-term contracts are important to consider, these supplies will likely find alternative buyers with nominal impacts to prices.

Looking Ahead

• Early-2025 inflationary risks skew to the upside. These risks are reflected in the market’s bets on 2025 rate cuts, as implied forecasts from fed funds futures indicate expectations for just two rate cuts by December 2025.

• As indicated by yesterday’s 30-day tariff pause on Canada and Mexico, rapid changes to trade/tariff policies should be expected.

• US government indicators for industrial activity offered some counterarguments to the ISM’s survey results today. However, these are lagging indicators and subject to revision. The first expansion in the ISM’s manufacturing PMI since October 2022 likely outweighs the Census Bureau’s revised 0.9% M/M decline in new orders for US-manufactured goods.

This commentary contains our views and opinions and is based on information from sources we believe are reliable. This commentary is for informational purposes, should not be considered investment advice, and is not intended as an offer or solicitation with respect to the purchase and sale of commodity interests or to serve as the basis for one to decide to execute derivatives or other transactions. This commentary is exclusively intended for Mobius clients and is not considered promotional material.