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Stocks and bonds retreated after data indicated that US business activity accelerated alongside a rise in inflation, reinforcing expectations that the Federal Reserve will maintain its current policy stance.

Following a solid performance by Nvidia (NVDA) and stretched market positioning, investors were particularly vulnerable to negative news. The S&P Global US PMIs release delivered just that, triggering the pullback.

Well, so much for the slowdown brewing in the tea leaves.

US business activity surged in May, as shown by preliminary PMIs released by S&P Global on Thursday. These updates might not rank as “top-tier” data, and they’ll quickly be forgotten once ISM releases its May PMIs in a few weeks. However, today, they packed a punch as incremental, context-filling releases without said top-tier data to fill this week's data void.

PMI services jumped to 54.8 in the flash reading, significantly up from April’s final print, marking the briskest expansion in a year. Analysts had only expected 51.5. The manufacturing PMI also exceeded expectations, coming in at 50.9 compared to the anticipated 50.1.

“The economic upturn has accelerated again after two months of slower growth, putting the US back on course for another solid GDP gain in the second quarter,” commented Chris Williamson, S&P Global's chief business economist.

While this data suggests a more robust economy, it paradoxically spells trouble for the markets banking on multiple Federal Reserve Interest Rate cuts this year.

The Fed needs the economy to slow down to bring inflation back to 2%. An economy that's performing too well can hinder this goal.

“Selling price inflation has ticked higher and continues to signal modestly above-target inflation,” Williamson noted. He added that “the main inflationary impetus is now on the goods side.”

Service inflation, where sticky inflation has been hiding out for the past year, remains elevated. With renewed upward pressure on goods prices, this suggests inflation is running above target across both sectors ( Goods & Services)  of the economy. 

With consumer prices elevated based on pre-pandemic standards and showing little signs of abating, the final mile down to the Fed’s 2% target may prove elusive.

While the S&P Global release may not be considered top-tier data price action overnight, it underscores the reality that markets become highly susceptible to even mildly negative news when investor positions are stretched.

" Our Risk Appetite Indicator reached a new high since 2021 on Friday,” analysts including Andrea Ferrario and Christian Mueller-Glissmann wrote in the Banks Commentary this week.

So when everyone is on the "risk on" wagon, it usually means investor positioning; hence, markets are overly susceptible to even mildly bad news. If this is not intuitive, do not quit your day job. 

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