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This Just In: U.S. Manufacturing is Hot

Uh oh. When markets priced in six rate cuts after September 2023, the rate pause did not hurt the S&P 500 (SPY) or Nasdaq (QQQ). Unfortunately, the manufacturing strength not seen since 2022 is bad news.

The Institute of Supply Management’s manufacturing PMI indicated expansion. This is the first positive signal since Sept. 2022. The 50.3 reading, up from 47.8 in February, sharply lowers the risk of a near-term recession. The Fed may save its rate cuts in June. It only needs to loosen credit conditions when the economy is worsening.

The expansion in manufacturing combined with higher prices are opposite conditions that would lead to an interest rate hike. In addition, the U.S. pivoted its manufacturing and supply chain activity out of China well before the country re-opened its economy. Firms like Intel (INTC) are investing in semiconductor plants domestically. Expect strong ISM to continue in the next few years as more firms copy Intel.

In the automotive sector, Ford, GM, and Stellantis (STLA) are also bringing manufacturing to the U.S. Demand for jobs will only increase. The shortage of workers, along with demand for higher pay, may bring upon wage inflation.

The market did not price in any chance of interest rates pausing in June. It expects three cuts, the first of which starts in only two months. If the Fed does not cut rates, markets may finally sell-off.