Markets were buoyed last week by the drop in longer-term (5-year) consumer inflation expectations in the US (Michigan). Stocks could rally because the Fed would not be so aggressive on rate hikes. But it is still too early to become constructive on equities: such a large drop in inflation expectations is a possible precursor to recession.
The first manufacturing survey of the month (Empire State) showed a significant decline in future activity. The US been through manufacturing recessions before when services have been largely unaffected. But the New York Fed Business Leaders Survey (of service firms) showed another decline in the diffusion index for future business activity to zero this month. This portends a drop in the non-manufacturing ISM new orders index towards 50 (currently 55.6).
It is not clear that a stock market rally can be sustained, given that the NAHB index is tumbling. The single month decline in the NAHB index in July was the largest since the initial stages of the pandemic (-12 points to 55). Sentiment for sales over the next six months slid. It remains to be seen how far the housing downturn will lead real estate stocks lower, leading to a renewed dip in the S&P 500.
The Fed is determined to keep pushing up short rates, but the real estate sector is one more reason for the Treasury yield curve (10-2s) to invert (further).
