- The US manufacturing PMI report showed expansion for the first time in nearly 18 months.
- The likelihood of a Fed rate cut in June fell from 64% to 58%.
- The S&P 500 closed its best first quarter in half a decade.
Equities fell on Monday as investors lost confidence in a June Fed rate cut due to upbeat manufacturing data. Notably, most sectors in the S&P 500 closed the day lower, except energy. This sector gained with oil as the demand outlook improved after upbeat manufacturing data from the US and China.
US rate-cut bets (Source: Bloomberg)
The US manufacturing PMI report showed expansion for the first time in nearly 18 months. Manufacturing drives a big part of the US economy. Therefore, the improvement could translate to a stronger economy. However, the good news is bad for the equities market as it could delay Fed rate cuts.
The Fed wants to see inflation fall to its 2% target. Consequently, interest rates have stayed high in the US. However, if the economy is robust, it could increase prices, halting progress toward lower inflation. Therefore, the Federal Reserve is more likely to keep interest rates high when the economy shows resilience. After the manufacturing report, the likelihood of a Fed rate cut in June fell from 64% to 58%.
Last week, policymakers, including Chris Waller and Raphael Bostic, said they expect fewer than three rate cuts this year. However, data on the US core PCE price index revealed a decline in inflation, supporting rate-cut bets.
In recent weeks, there has been a lot of uncertainty regarding the Fed’s timing for rate cuts. Expectations have kept swinging with incoming data and speeches from policymakers. Investors are expecting more such speeches this week, which might continue changing the outlook for US interest rates. Moreover, data on the US jobs market will shed light on a major sector the Fed monitors.
On Thursday, the S&P 500 closed its best first quarter in half a decade. Gains in the index came from AI optimism and expectations that the Fed will cut interest rates this year. Since the year began, the Fed has slowly become more dovish despite upbeat economic data. Policymakers have gained more confidence that inflation will reach the 2% target. Meanwhile, Powell confirmed that the Fed would cut at least three times this year. Although headline inflation has remained stubborn, underlying inflation is dropping and will likely pave the way for rate cuts.
