- US business activity in the manufacturing sector came in lower than expected at 48.7 in May.
- Fed policymakers are slowly getting more reasons to support rate cuts as early as September.
- A malfunction on the NYSE on Monday caused wild volatility for some stocks.
US equities rose on Monday because of weaker-than-expected manufacturing data, which increased the likelihood of a Federal Reserve interest rate cut in September. Meanwhile, a New York Stock Exchange malfunction caused some trading gaps in most equities.
US manufacturing (Source: ISM)
There was a bit more rate-cut optimism in the markets on Monday, which improved risk sentiment. Data from the Institute of Supply and Management on US business activity in the manufacturing sector came in lower than expected at 48.7 in May. This was a decline from the previous month’s 49.2. Moreover, it was the second month the figure declined, indicating a slowdown in the economy.
Consequently, the report rekindled hopes that the Fed would cut rates this year, with the likelihood of one in September rising from 55% to 59%. This report came after Friday’s core PCE price index, which showed cooler-than-expected inflation figures. Policymakers are slowly getting more reasons to support rate cuts as early as September. However, they will need more. Markets are still only fully pricing the first cut in November. Therefore, to push that forward to September would require more downbeat data from the US.
Investors will now wait to see how the services sector is faring when the ISM services PMI comes out on Wednesday.
Moreover, markets are gearing up for employment figures from the US that will significantly impact the Fed’s policy outlook. April’s employment numbers missed forecasts and raised rate cut expectations. However, after a while, markets sobered when policymakers held back from declaring a deterioration in the labor market.
The Fed needs to see more cracks in the sector to be confident that high interest rates are hurting demand. Therefore, traders are not only hoping for more poor employment data, they are also hoping policymakers will adopt a more dovish stance. This would boost Fed rate cut expectations and likely cause a rally in equities. However, if the figures beat forecasts as they did in the first quarter, rate cut expectations will fall, dampening risk appetite.
Elsewhere, a malfunction on the NYSE on Monday caused wild volatility for some stocks, like Berkshire Hathaway, before it was fixed. Consequently, there were gaps in trading for some equities before the issue was resolved.
