Fundamental Analysis

US Business Activity Expands, Equities Decline

  • The Dow Jones Industrial declined, wiping out its gains for 2023.
  • Business activity in the United States crossed back to expansion in February.
  • Business activity in the economies of France and Germany is once again expanding.

Major US equities plummeted on Tuesday as investors believed that a gain in the US economic activity in February signaled that the Fed would keep interest rates higher to curb inflation.

The Dow Jones (YM) futures prices sharply sold off, wiping out its gains for 2023, while the S&P 500 and Nasdaq Composite closed negative for the third session.

US business activity (Source: S&P Global)
US business activity (Source: S&P Global)

The declines occurred after the S&P Global Purchasing Manufacturer’s index, which measures business activity in the United States, returned to expansion in February for the first time in eight months. According to the survey, the firm services sector helped push the reading to 50.2 from 46.8 in January.

The report reinforced a recent flood of economic data that offered a picture of a strong economy that continues to function despite the central bank raising interest rates multiple times in 2022 to contain inflation.

Money market participants have been adjusting upwards where they see the Fed fund rates peaking – currently at 5.35% in July and holding close to those levels throughout the year. This is because inflation is still well above the Fed’s 2% target, and the economy is still strong.

After posting their worst yearly performance in over a decade in 2022, US stocks had a positive start to the year as investors anticipated the central bank’s string of rate hikes was ending. Yet, when data contradicts such assumptions, such optimism makes equity markets vulnerable to pullbacks.

The minutes from the Fed’s most recent policy meeting, expected to be released on Wednesday, will be closely scrutinized by investors for additional hints about the central bank’s views on rates.

Tuesday saw a decline in European equities as anticipation of rising interest rates was fueled by positive economic data. Data revealed that business activity in the economies of France and Germany was once again expanding, and the euro zone’s booming services figures suggested that the business activity rebound was gaining momentum.

According to Goldman Sachs, the European Central Bank will increase interest rates three times this year, raising the terminal rate from the previously predicted 3.25% to 3.5%.