S&P500 Facing Major Resistance, As US Manufacturing Inflation Softens

Inflation has been keeping the FED on a very steep monetary tightening path, which has been sending the USD higher and the stock markets lower since early this year. But, in recent months we have seen a slowdown in the US economy, and last week the US fell into an official recession.

European manufacturing is heading into recession as well, although in the US this sector is still clinging on and today’s number showed that despite slowing, the activity in July was better than expected. Besides that, inflation growth seems to be abating, which means slower rate hikes from the FED and further upside for stock markets.

S&P500 H4 Chart – Buyers Facing the 200 SMA

The pressure continues to remain bullish for SPX 

Stock markets were quite bearish during the first half of this year, as inflation kept surging and central banks started a very steep path of monetary tightening. But, as inflation starts to show signs of cooling off and economies signs of recession, stock markets are starting to feel better, since central banks are put off strong rate hikes on such a combination of factors. As a result, the US S&P500 index has been making gains and is facing the 200 SMA now, so let’s see if it will succeed.

US July Manufacturing PMI

• July manufacturing PMI 52.8 points vs 52.0
• June manufacturing was 53.0 points
• Prices paid 60.0 points vs 75.0 expected (prior 78.5) — fourth largest decline on record
• Production 53.5 points vs 54.9 prior
• Employment 49.9 points vs 47.3 prior
• New orders 48.0 points vs 49.2

It’s all about the price paid number. I’m a bit confused on why the consensus was so high. The prices component measures the delta so a decline shows a slower pace of price increases, which makes sense to me given what’s happened in commodities. In any case, this report is what the Fed would have hoped to see.

“The slowing in price increases is being driven by (1) volatility in the energy markets, (2) softening in the copper, steel, aluminum and corrugate markets and (3) a significant decrease in chemical demand. Notably, 21.5% of respondents reported paying lower prices in July, compared to 8.3 percent in June,” the report said.

On the downside, new orders are a bit concerning. There’s a notable comment below about companies drawing down inventories on recession fears. That kind of thing can become self-fulfilling.

Comments in the report:

• “Material extended lead times still affecting business, and the challenging labor market is a huge factor too. Backlog is healthy; we just cannot deliver to customers due to material issues.” [Computer & Electronic Products]
• “Inflation is slowing down business. Overstock of raw materials due to prior supply chain issues and slowing orders.” [Chemical Products]
• “Chip shortages remain; however, the COVID-19 lockdowns in China are presenting even worse supply issues.” [Transportation Equipment]
• “Growing inflation is pushing a stronger narrative around pending recession concerns. Many customers appear to be pulling back on orders in an effort to reduce inventories.” [Food, Beverage & Tobacco Products]
• “New order entry has slowed down slightly; however, logistical issues have yet to improve. Long lead times for materials and labor shortages are still a major problem.” [Machinery]
• “Our markets are still holding up; however, I believe a slowdown is coming. We are cautious about going out too far with orders. Also, I believe the general market is in the beginnings of a recession.” [Fabricated Metal Products]
• “All markets are extremely busy but face headwinds that will eventually take a toll. Lead times and costs make large projects very challenging to budget, plan and execute. Routine work is also very difficult.” [Nonmetallic Mineral Products]
• “Current order books are full, but there have been signs of a slowdown beginning in the fourth quarter.” [Plastics & Rubber Products]
• “Slight improvement projected for our business for the next quarter.” [Primary Metals]
• “Continuing delivery and staffing issues have eaten away the bottom line.” [Textile Mills]

July Final S&P Global US PMI

• July final S&P Global US manufacturing PMI 52.2 points vs 52.3 expected
• Prelim manufacturing PM was 52.3 points
• June manufacturing PMI was 52.7 points
• Rates of input cost and output charge inflation softened again in July. Although still substantial in the context of their respective series histories, the increases were the slowest for over a year

This is a tiny revision lower but the release highlights diminishing inflation pressures.