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Data: Federal Reserve Bank of Philadelphia, projection from Wall Street Journal; Chart: Axios Visuals

The Philadelphia Fed's manufacturing business outlook rose to near its highest level on record and notched its biggest reading above economists' expectations in history.

The big picture: Analysts at BMO Capital Markets note that the monthly reading is among the highest in history (in the 99th percentile) going back 30 years and marked the largest two-month jump since 1995.

Why it matters: The survey's results were taken in the immediate aftermath of the phase one U.S.-China trade deal, which bolstered expectations among many in the manufacturing industry.

  • The Fed's index is largely a gauge of sentiment, rather than hard numbers, and shows manufacturers are bullish on the deal.

Details: The future general activity diffusion index, which measures firms' expectations six months ahead, rose to 45.4 from 38.4 in the previous month. More than half the firms surveyed expected activity to rise over the next half year, and new orders almost doubled, rising to 33.6 from 18.2.

Yes, but: Following Wednesday's strong producer prices report, which showed the largest gain since October 2018, the Philly Fed survey provided more evidence of upward pressure on costs. Prices paid rose to 19.7 from 14.6.

  • If manufacturers continue to report higher prices paid, it's expected that consumer prices will also begin to rise.

One more thing: The index's employment component fell significantly to 9.8 from 19.3.

The intrigue: Despite the PPI report Wednesday and the Philly Fed reading Thursday showing serious potential for inflation to pick up, expectations for the Fed to cut rates by year-end remain near 90%, according to CME Group's FedWatch tool.

Go deeper: Fed manufacturing indexes jump in January

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