US stocks kicked off August on a downbeat note, marking a shift in direction after their best month since 2020 as recessionary fears tempered expectations of how far the Federal Reserve would raise interest rates.
The S&P 500 slipped 0.6 per cent lower after the New York opening bell, following an ascent of 9.1 per cent over the course of July. The technology-heavy Nasdaq Composite gauge also fell 0.6 per cent, having climbed 12.3 per cent last month — its biggest such gain since April 2020.
Those moves came as traders awaited a closely watched manufacturing survey for the world’s largest economy, which was expected to show that growth in US activity slowed in July. Economists polled by Reuters predicted a reading of 52 for the Institute for Supply Management’s purchasing managers’ index, down from 53 the previous month. Any figure above 50 signals expansion.
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,” ING greater China economist Iris Pang 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.”
Europe’s regional Stoxx 600 share index edged 0.1 per cent lower on Monday. An index of European banking stocks rose 1 per cent, lifted by quarterly earnings from lender HSBC that beat analysts’ forecasts.
Brent crude, the oil benchmark, dropped 4.2 per cent to $99.66 a barrel.
In recent weeks, investors have scaled back their expectations of the extend 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 2.25-2.5 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 as the country’s leading prime minister candidate said that she planned to comply with EU budget rules if elected. The yield on Rome’s 10-year debt dropped 0.1 percentage points, sitting below 3 per cent for the first time since May.
