Inside Markets — PMI Miss

US, Eurozone and UK flash manufacturing PMI missed expectations and fell deeper into contraction, while services held up better. The US PMI data showed a cooling in employment, but firming wage pressures. This resulted in higher costs while selling prices increased at their slowest pace since October 2020. The combination of higher input costs and lower selling prices points to margin pressure going forward.

The Fed’s Bostic reiterated that he favors no more rate hikes for the year, while Daly said an additional 50bp of tightening is a reasonable projection. Weaker activity data, sticky US core inflation and aggressive monetary tightening are driving increased recession concerns this morning.

Yesterday, the S&P 500 (SPX) managed to close in the green after three straight daily losses. Unfortunately, the small advance came with narrow leadership in mega-cap Tech. Narrow leadership in a rising market is usually an ominous bearish signal. The cyclical sector leadership that followed the late-May uptick in the US Economic Surprise Index (ESI) was an encouraging development that pushed the index above technical resistance at 4195. Today’s disappointing manufacturing PMIs are a step in the wrong direction with cyclical groups under pressure.  The current pullback will only be a healthy consolidation if the SPX can maintain levels above 4195.  Note that equity positioning and sentiment are no longer contrarian supports. Positioning has significantly increased over the last 8 months and bullish sentiment is at a two-year high. A break below that level or a spike in equity volatility could turn this consolidation phase into something far more painful.