Gradually, Then Suddenly!

Central Banks worldwide have finally begun the monetary easing cycle as inflation has gradually settled around 3% and economic activity has stalled.

As expected, the ECB and Bank Of Canada (BOC) announced 25 bps cuts this week.

However, the cuts were termed “hawkish” as inflation projections were raised, and the central banks confirmed that further cuts would depend on the incoming macro data.

In the US, the gambling party has reached unprecedented levels, and we are witnessing history.

The speculative mania has now crossed all thresholds as the trading value of the world’s second-largest company’s stock has exploded to mind-blowing levels.

NVDA’s trading volume on Thursday surpassed the volumes of the next 20 actively traded stocks.

The frenzy is now more and more replicating the 2001 dot com bubble, which we all know how ended.

Nevertheless, let’s decipher the slew of macro data this week and comprehend what lies ahead of us in H2.

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US!

Our preferred measure to gauge cyclical activity in the US has been ISM Manufacturing, despite concerns raised by market participants about its effectiveness.

Some people believe ISM Manufacturing has been a false flag post-COVID as it has been under contraction (below 50 reading) for most of the last two years.

However, one needs to appreciate the fact that there was a significant anomaly post-COVID-19 when inventories rose manifold. When the economy reopened, inventories diminished as new orders rose, which companies could not fulfil due to supply chain problems.

Nonetheless, New Orders less Inventories is one of the best indicators which predict the path of ISM Manufacturing.

As we can observe, New Orders Less Inventories has collapsed. If the trend persists for the next few months, ISM Manufacturing might contract to below 45 levels, raising alarm across the investor community.

On the contrary, ISM Services surprised on the upside, with headline print at 53.8 beating all the estimates, demonstrating that services activity remains robust.

In fact, higher ISM Services were led by the ISM Prices Paid, which came in at 58.1 and is tightly correlated with the CPI. However, ISM Services have become too volatile in recent months, and one needs to wait for the trend to infer the direction.

Thus, one should be cautious about reading too much into ISM Services and getting excited about the “soft landing” of the economy.

This is because (long-time readers know) we have multiple times in the past written about how the current macro setup is similar to the