Stocks Badly Want Fed Rate Cuts. This PMI Data May Show Why.
Stocks Badly Want Fed Rate Cuts. This PMI Data May Show Why.
By:Ilya Spivak
Is this why the markets are so worried about what the Fed will do?
- July FOMC meeting minutes struck a more hawkish tone that the markets wanted
- Wall Street may be hoping that recent inflation and jobs data will spur the Fed to act
- PMI surveys are next in focus for a clue about how urgent stimulus is for US growth
Wall Street was not pleased with what Federal Reserve officials signaled in minutes from July’s meeting of the policy-setting Federal Open Market Committee (FOMC), as expected. The document painted a more hawkish picture than might have been surmised after two governors dissented from the wait-and-see consensus in favor of cutting rates.
A majority of participants in last month’s FOMC meeting judged that upside risk to inflation was the greater concern compared to downside risk to employment. They broadly expected prices to increase in the near term due to tariffs. With that in mind, almost all of them favored keeping rates unchanged, but for the two dissenters.
FOMC meeting minutes disappoint the markets’ dovish hopes
Some officials argued that it is neither feasible nor appropriate to wait for full clarity on the tariffs’ effects before adjusting policy, but others warned about risks to long-term inflation expectations and vulnerabilities from elevated asset prices. Interestingly, some noted that current rates are not far from neutral, hinting at modest scope for cuts.
Stock markets were already under pressure when the FOMC minutes hit the wires, extending the prior day’s selloff led by the tech sector. The apparent lack of urgency at the US central bank added to selling pressure, but a rally into the session close trimmed losses. The S&P 500 closed down 0.3%, having lost as much as 1.09% intraday.
Perhaps traders judged that the readout from last month’s policy meeting is old news, with Chair Powell and company now likelier to ease having seen downbeat jobs data alongside seemingly steady consumer inflation figures. Indeed, the priced in probability of a 25-basis-point (bps) cut in September still looks commanding at 82%.
PMI data may spook stocks if US growth stumbles as the Fed dithers
Still, the markets clearly see a tougher path for the economy than the Fed does. For over a month, they’ve tilted toward three rate cuts in 2026, while central bank officials have penciled in just one. Tellingly, inflation expectations priced into bond markets have barely budged from the six-month lows set in April amid the US tariffs rollout.
The spotlight now turns to purchasing managers index (PMI) data from S&P Global. It is projected to show that the pace of US economic activity growth has cooled in August as the service sector slowed while manufacturing continued to contract. Earlier in the day, analog figures are expected to put the Eurozone at near-standstill yet again.
Coupled with ongoing deflationary malaise in China, this leaves the US as a lone pillar of growth among the three major engines of global demand. This helps explain why the markets are so sensitive on the subject of Fed stimulus, and hints that they would be most displeased if it seems like officials are dithering as it too begins to misfire.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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