Stocks traded slightly lower today as traders set their sights on the Fed’s impending minutes release. Meanwhile, trepidations over a struggling Chinese economy and slumping Eurozone manufacturing continued to cast a shadow over market enthusiasm.
The Dow, S&P, and Nasdaq Composite held on to minor losses through noon as a result. But the indexes remain near their yearly highs, and within striking distance of higher highs should they rise any further.
Investors have one eye trained on the minutes from the Federal Reserve’s June policy meeting, slated for release this afternoon at 2 pm EST. Although no major revelations are anticipated from the minutes, traders hope to glean insights into the rationale behind last month’s “skip” on raising rates.
Market players are also eager to discern what factors might influence potential rate adjustments in July. The CME FedWatch Tool indicates that traders are betting on an 88.7% likelihood of the Fed elevating its key interest rate by another 25 basis points at the next meeting.
US economic data showed a modest 0.3% rise in orders for manufactured goods in May, as reported by the Commerce Department this morning. Despite being the fifth increase in six months, it fell short of the Wall Street Journal’s forecasted 0.6% hike.
Fresh data from China also sparked concerns about a global slowdown. The world’s second-largest economy reported worse-than-expected service sector activity in June, indicating that China’s recovery from last year’s Covid lockdown is continuing to lose momentum.
Commodities closely tied to the Chinese market demand such as copper felt the squeeze, while China-sensitive stocks and ETFs fell as well. Las Vegas Sands (NYSE: LVS), a resort stock with Chinese exposure, endured a whopping 4.4% loss, underperforming its peers.
But that’s not all; the Eurozone Producer Price Index (PPI) came out this morning, too, and showed a year-over-year contraction (ie, deflation) in headline prices.
Deflationary winds swept particularly hard through Belgium, Greece, and Ireland, as these countries experienced the most significant producer price contraction year-over-year (YoY) of all the countries tallied. In contrast, Hungary, Slovakia, and Latvia saw an uptick.
A substantial 5% month-over-month (MoM) decline (or 13.3% YoY) in energy prices has primarily driven the PPI descent. But core PPI, excluding energy and construction, stayed resilient with a 3.4% YoY increase, even after accounting for a 0.4% MoM drop.
Further clouding the economic outlook, Eurozone Purchasing Managers’ Indices (PMIs) brought disappointment, slipping back into contraction territory (sub-50) as the services sector endured a downturn in June.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, reflected on the PMI data, stating:
“Significant momentum has been lost across all major euro countries in the services sector, which after a sluggish Q4 of 2022 had shown signs of acceleration at the year’s start.”
He further noted the concurrence of decelerated business activity growth with a softer rise in new business, diminished price increases, and a drop in business expectations. Despite this, he pointed out that the pace of job creation in the service sector remained steady compared to the previous month, with ongoing indications that growth slowdown would likely persist in the months ahead.
Dr. de la Rubia elaborated on the country-specific dynamics, “Among the big four eurozone nations, France experienced the steepest drop in the service sector momentum. Its service firms reported a decrease in activity compared to the previous month, likely impacted by pension reform protests and recent strikes.”
He contrasted this with Germany, where businesses ramped up their staff count even more than in May. However, France, Italy, and Spain saw slower employment growth, but all the big-4 eurozone nations continued hiring, supporting private consumption and cushioning the economic downturn.
He further addressed the European Central Bank’s (ECB) particular interest in price pressure within the services sector:
“Though it has eased somewhat, input costs continue to surge significantly by historical standards. Service firms are still in a position to pass on at least some of these cost increases, some of which are due to higher wages, to end customers. This is mirrored in the stubbornly high core inflation, which is why the ECB is likely to continue to hike policy rates.”
The data and sentiment reflect the ECB’s firm stance on maintaining ‘higher for longer’ rate hikes, even as the specter of a recession looms.
An overall bearish swing in global sentiment could leave US stocks vulnerable, particularly in the wake of recent robust gains and bullish positions. Notably, the S&P clocked in at a 14-month high before the Independence Day holiday, having risen 16.1% for the year. This surge was driven by heightened optimism among investors and above-average hedge fund bets.
And though the medium-term trend in equities remains bullish, with the S&P hitting a new yearly high, the risk of a market pullback has been progressively mounting. Today’s minutes release from the Fed could provide a catalyst for a snap correction lower, but history suggests that the market should exhibit a muted response. Or, even a bullish one, considering that rate hike odds are already so high (88.7%) and tech shares seem primed to jump again following their sudden rebound over the last few sessions.