INTEREST RATE CUTS Ahead??💥💥

- The main ISM Manufacturing PMI data published yesterday fell to 48.5 in May, down from 48.7 in April, marking the third consecutive month in contraction territory (below 50). This is not just a temporary decline, as 57% of GDP in the sector shrank in May, compared to 41% in April, indicating that weakness in the industry is spreading. The new orders index, a key leading indicator, was at 47.6 (slightly up from 47.2), but this still represents four consecutive months of contraction. Production also remained weak at 45.4, although it increased from 44.0 in April. Employment continues to decline, with the index at 46.8, barely above last month's level.

- One of the most concerning indicators, in my opinion, is the prices paid index. It remains very high at 69.4, only slightly lower than 69.8 in April. This means that manufacturers are facing persistent inflationary pressures, mainly due to tariffs and supply chain disruptions. Imports have hit a 16-year low, and exports a five-year low, highlighting how trade tensions and retaliatory tariffs are impacting demand and supply chains. Interestingly, while some sectors, such as clothing, plastics, and oil, reported an increase in new orders, most, including key sectors like food, electronics, and chemicals, are still contracting. ISM survey participants mentioned a ratio of 3 to 1 negative to positive comments, indicating reduced production and uncertainty in the business climate.

- How does this affect the Fed's next move? Markets are currently pricing in around 50 basis points of interest rate cuts by the end of the year, down from 75 basis points a month ago, indicating some reduction in aggressive bets on policy easing. I believe this persistent contraction, especially with still stubborn inflation, puts the Federal Reserve in a difficult position.