Wall Street stocks pause after best month since 2020

US stocks zigzagged after capping off their best month since 2020, as signs of economic slowdown and easing inflation tempered expectations of how far the Federal Reserve would raise interest rates.

The broad S&P 500 was little changed on Monday following an ascent of 9.1 per cent over the course of July. The technology-heavy Nasdaq Composite added 0.1 per cent, having climbed 12.3 per cent last month, its biggest such gain since April 2020.

Trading volumes in equity markets are typically thinner during the summer vacation period.

Monday’s moves came as a survey of US manufacturers indicated that cost pressures on companies in the world’s biggest economy may be easing. The Institute for Supply Management’s prices index gave a reading of 60 for July, far below expectations of 75 and down from 78.5 in June.

The same report showed that the growth of activity in the US factory sector slowed slightly in July. The ISM manufacturing purchasing managers’ index delivered a reading of 52.8, down from 53 the previous month and better than economists’ expectations of 52. Any figure above 50 signals expansion.

Line chart of ISM price index showing Cost pressures in US factory sector ease

Disappointing Chinese factory data over the weekend had already muddled the economic outlook. Official data showed that factory activity for the country contracted unexpectedly last month, after new coronavirus flare-ups and stress in the nation’s property market weakened demand. The PMI for the manufacturing sector gave a reading of 49, down from 50.2 in June.

“Both domestic demand and external demand for manufacturing were weak,” Iris Pang, greater China economist at ING, said in a note to clients.

“Uncompleted real estate projects could be at least part of the reason,” Pang added, after indebted developers suspended construction of millions of apartments. Pang also cited a “risk of contagion from financially unhealthy property developers to their downstream and upstream industries”.

Line chart of Official purchasing managers’ index showing China factory sector slips back into contraction territory

Europe’s regional Stoxx 600 share index traded flat on Monday. An index of European banking stocks rose 1.4 per cent, lifted by quarterly earnings from lender HSBC that beat analysts’ forecasts.

Brent crude, the oil benchmark, dropped 3.8 per cent to $100 a barrel.

In recent weeks, investors have scaled back their expectations of the extent to which the Fed will tighten monetary policy to curb red-hot inflation. Futures markets on Monday were pricing in a benchmark interest rate of about 3.3 per cent for February 2023, down from expectations of 3.9 per cent in mid-June. The US central bank’s current target range stands at 2.25 to 2.5 per cent, after it raised borrowing costs by 0.75 percentage points for the second time in as many months last week.

Markets are “looking beyond the well-known inflation issue and what they see as a slowdown which will force central banks to ease again”, said Antonio Cavarero, head of investments at Generali Insurance Asset Management.

In government debt markets, the yield on the benchmark 10-year Treasury note was steady at 2.64 per cent. This followed a strong rally for government debt last week after data showed the US economy had contracted for the second consecutive quarter.

Elsewhere, Italian government bonds rallied after weeks of coming under intense pressure. The yield on Rome’s 10-year debt dropped 0.14 percentage points, sitting below 3 per cent for the first time since May.

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