Stock Markets Are at Risk if Fed Chair Powell Dithers on Rate Cuts

How much pain must the US economy endure to bring the Fed in off the sidelines?

• May global PMI surveys reveal an economic slump in Europe and Japan.
• US PMI signal a pickup, but only thanks to short-term tariff frontrunning.
• All eyes on Fed Chair Powell for clues about when the Fed might step in.

The US economy showed some welcome signs of life in May, according to the latest update of purchasing managers index (PMI) data from S&P Global. The pace of economic activity growth quickened after sinking to a 19-month low in April. Acceleration came to the manufacturing sector and services alike

This marked a sharp contrast with analog PMI results tracking performance in other major economies. Japan, the UK, and the Eurozone saw activity contract. In the single currency bloc, the service sector posted the sharpest decline since January 2024. In Australia, growth slowed to near-standstill.

Global markets seesaw as Europe, Japan, and US PMIs diverge

The data’s impact was readily on display in the markets. Stocks fell in Europe after the region’s PMI results hit the wires, then rebounded alongside Wall Street after the US survey appeared a few hours later. The euro followed a similar cadence, taking a step lower on its PMI release, then pausing to digest before slipping again on the US one.

Recent economic data has produced unwelcome early warning signs pointing to stagflation, a policymaking nightmare where price growth is accelerating while economic growth is cooling. That forces officials to reconcile conflicting objectives, which can bog down stimulus and translate into long-lasting economic weakness.

At first glance, May’s US PMI report appears to mark a welcome reprieve. Anemic conditions in Europe and China have weighed on global growth since the middle of last year. A strong US economy powered by a buoyant service sector helped keep recession fears at bay until the start of 2025. Growth has slowed sharply and almost stalled last month.

US tariff front-running has delayed “stagflation” forces

Looking past the headline figures to the underlying data is a sobering affair, however. Inventories surged by the most since data began to be collected 18 years ago, pointing to spirited front-running ahead of the new reciprocal tariff cliffhanger when a 90-day reprieve on rates above 10% expires.

Bottlenecks became more acute along supply chains as delivery times lengthened to the greatest extent since October 2022. This alongside the stockpiling rush fueled sharply higher prices. Average costs jumped at a rate unseen since August 2022, when the inflationary spike after the COVID-19 pandemic was still near its peak.

All this amounts to a worrying backdrop. Restocking is a short-term impetus for growth. Indeed, US manufacturers and service providers both cut employment, signaling reticence about extrapolating demand into the future. Moreover, it may leave firms holding the bag if gloomy consumers are slow to draw down inventories as spending slows.

Will Fed Chair Powell offer a lifeline to the markets?

As much has already shown up in key economic statistics. The first quarter produced the weakest consumption growth in almost two years. The second quarter is on track for another poor showing. Last week’s data flow pointed to anemic retail sales and sinking sentiment even as businesses shielded consumers from tariff-related costs.

With this in mind, the spotlight turns toward a weekend speech from Federal Reserve Chair Jerome Powell. The central bank seems to have no clearer picture of which side of its mandate to prioritize than it’s had since March, when it began to highlight the tariff-induced conflict between higher prices and weaker growth as a reason to stay put.

More of the same might signal to the markets that the central bank will be slow to respond to whatever economic weakness emerges after the tariff front-run window closes, waiting for the drop in demand to appear as disinflation before acting. This may put pressure on stocks and the dollar even as it bids up longer-dated Treasury bonds.

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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