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• US June manufacturing data came out worse than expected
• Prices in the sector declined too
• US stocks may rally if the Fed turns dovish

Today is Independence Day in the United States, and US banks are closed. As such, market participants should not expect much from the upcoming North American session.

Yesterday was a slow day, too, as many people preferred to take a long weekend in light of the 4^th of July holiday. But make no mistake; volatility is about to pick up as this is an important week for financial markets.

With many US market participants on holiday, it was unsurprising that the market did not react to the June Manufacturing PMI data. Economists expected the manufacturing sector to rebound from 46.9 previously to 47.2. Instead, the data showed further deterioration in the sector, as indicated by the 46 print.

As a reminder, a print below 50 signals the sector’s contraction.

Looking at the last twelve months, the US manufacturing sector entered contractionary territory in November last year and remained there ever since.

From this perspective, US stocks should have difficulty rallying as the prospects of an economic recession loom large. But stocks’ price action was mostly driven by the Fed’s tightening cycle.

Therefore, the poor manufacturing data may act as a warning for the Fed to no longer raise the funds rate. Such a development would be bullish for US stocks.
 

ISM Manufacturing prices decline further

Another interesting detail of June’s manufacturing report in the US was that prices in the sector fell further. More precisely, the ISM Manufacturing Prices came at 41.8 vs. 44 expected. Any print below 50 shows falling prices, and it signals to the Fed that inflation pressures are easing in the manufacturing sector.

This should be bullish for US stocks as the chances of the Fed hitting the terminal rate increase substantially.
 

All ISM components are below 50 – is a US recession imminent?

The last interesting detail of yesterday’s report supports the case that a US recession is imminent. All of the ISM components are below 50, something that does not happen that often.

In fact, whenever it happened in the last two decades, the US economy was in a recession.

Hence, as ironic as it may sound, poor manufacturing data in June may be bullish stocks because it gives the Fed more reasons not to hike.

And, why not – start cutting rates later in the year?

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