Empire Manufacturing Survey collapses
On June 17, the Empire State Manufacturing Survey was released by the New York Fed. The index collapsed from 17.8 to -8.6 in June. The collapse was the highest on record, and the print was the first negative since October 2016. Economists had been expecting the reading to come in at 11.0. Any reading of below zero indicates a contraction in activity.
Moreover, there was broad-based weakness in the report, with new orders, shipments, unfilled orders, and inventory all declining. Manufacturing activity has remained weak in the US in 2019. The ongoing US-China trade war is one of the reasons for the slowdown in manufacturing.
Economic indicators weakening
On June 13, the Morgan Stanley Business Conditions Index fell by 32 points from 45 in May to 13 in June, marking the largest one-month decline in the index on record. This decline implied a sharp deterioration in sentiments across sectors. In addition to these indicators, the US employment report for May was weaker than expected, and US consumer price inflation was lower than the market’s expectation.
Equity markets and Fed rate cut hopes
Due to the ramping-up of trade tensions and weaker economic reports, the S&P 500 Index (SPY), the Dow Jones Industrial Average (DIA), and the NASDAQ Composite Index (QQQ) have fallen 1.6%, 1.3%, and 4.4%, respectively, between May 5 and June 14. In comparison, safe-haven assets have been gaining, with the SPDR Gold Shares (GLD) gaining ~5% in the same period.
As a result of the ongoing US-China trade war and the weaker-than-expected economic reports, the markets are expecting the Fed to cut rates to support the economy. The Fed is scheduled to meet on June 18–19. While the markets aren’t expecting a cut from Fed at the June meeting, market participants are waiting with bated breath for clues on the Fed’s next moves. A dovish message from the Fed could lead to a stock market surge, whereas a hawkish message could lead to a sell-off.