Contraction - Dovish - All Time High

The US economy is exhibiting clear signs of a slowdown, as evidenced by the latest June PMI data. Both the services and manufacturing sectors have entered contraction territory, with significant drops in key metrics such as new orders and employment. At the same time, the Federal Reserve continues its battle against inflation, and the recent PMI data supports signs of easing inflationary pressures. The stock market continued its abnormal trend of reacting positively to negative development in the economy, with investors more convinced in 2 rate cuts by the end of 2024, leading S&P500 and Nasdaq to reach all time high on Friday.

Purchasing Manager's Index

The June PMI data presents a stark picture of the US economy's current state. The services sector PMI plunged from 53.8 in May to 48.8 in June, marking the first contraction in business activity in four years. New orders in the services sector also contracted for the first time in over a year, while the employment index continued its five-month streak of declines. The manufacturing sector followed suit, with its PMI falling to 48.5, indicating a continuous contraction that has now lasted for three consecutive months, and persistent contraction for 19 out of the past 20 months.

Services Sector PMI:
The significant drop to 48.8 reflects a sharp decline in business activity, with new orders and employment indices also contracting. This suggests a cooling demand and increasing caution among service providers.

Manufacturing Sector PMI:
The manufacturing sector's PMI of 48.5 underscores the ongoing challenges faced by this sector. New orders and production levels have both entered the contraction zone, indicating reduced demand and production cuts.

New Orders and Employment:
Both indices show worrying signs of weakening demand and labor market conditions. The new orders index for manufacturing slightly rebounded but remained below 50, while the employment index fell back into contraction.

ADP Employment:

Initial unemployment claims have continued to rise, with the latest figures slightly exceeding market expectations. The ADP report showed a decrease in new jobs to 150,000, marking the lowest increase in four months. Meanwhile, job vacancies experienced a slight rebound but remain below the peaks seen earlier in the year.

The ADP National Employment Report for June revealed an increase of 150,000 jobs, a decline from May's 157,000. This was the lowest increase in the past four months, indicating a slowdown in job creation. Particularly, the added 136,000 jobs, saw a reduction compared to the previous month. This slowdown in job creation reflects businesses' increasing caution amid economic uncertainties.

Fed Policy Making Likely Turn Dovish

The easing inflationary pressures indicated by the PMI data are crucial for Federal Reserve policy making. As inflation shows signs of abating, the Fed is likely to gain confidence in moderating its aggressive monetary stance. The market anticipated rate cuts in September and December align with the observed trends, suggesting that the Fed is preparing to shift towards a more accommodative policy to support the economy as it slows down. The decline in ADP employment growth further supports the Fed's cautious approach, as it highlights a cooling labor market that could reduce inflationary pressures. 

The stock market reacted positively, with Nasdaq and S&P500 reaching all time high on Friday. However, investors should still be cautious of the High for Longer case of US Central Bank interest rate policy, as our previous studies showed signs of elevated long-term central bank neutral rate.