The major domestic equity indexes rallied sharply on Tuesday to chalk up their largest one-day gains in five months after Federal Reserve Chair Jerome Powell left the door open for a possible rate cut.
Powell said the central bank would act “as appropriate” to address trade war risks a day after St. Louis Fed chief James Bullard said a rate cut may be warranted soon. Powell said the Fed was “closely monitoring the implications” of a trade dispute that has disrupted global markets.
The last time the benchmark S&P index showed a larger daily percentage gain was on Jan. 4, when Powell turned more dovish after a late 2018 sell-off, with a promise that the Fed would be patient and flexible in its interest rate path.
The rumors on the Street are that the Fed would cut rates at least once by the end of 2019, according to CME Group’s Fedwatch, and Tuesday’s comments helped to back up these bets.
The S&P 500 shed more than 6% in May on fears of a global growth slowdown while trade tensions ramped up between the United States and China and the United States and Mexico.
A Washington Post report that Republican lawmakers were discussing whether they may have to vote to block President Trump’s planned new tariffs on Mexico also helped sentiment.
Earlier in the day, China’s commerce ministry said the differences and frictions with Washington should be resolved through dialogue.
The tech-heavy Nasdaq’s rebound on Tuesday came after it confirmed a correction on Monday, having lost more than 10% since its record closing high on May 3.
The technology sector was the biggest boost to the S&P with a 3.3% advance, led by gains in Apple and Microsoft. Rising Treasury yields aided the S&P 500 bank index, which rose 3.65%.
Only the dividend-paying real estate sector ended the day in the red with a 0.6% drop as investors poured their money into riskier bets.
However, utilities, typically seen as one of the most defensive bets, edged slightly higher with a 0.04% gain.
Approximately 7.53 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.16 billion share average in the past 20 trading sessions.
The Day’s Economic News
New factory orders fell in April and shipments dropped by the most in two years, indicating continuing weakness in manufacturing activity that could hurt the broader economy.
According to the Commerce Department moderate consumer spending as well as weak home sales, construction and equipment outlays in April pointed to economic growth that is slowing sharply after a temporary improvement from trade, inventories and defense spending in the first quarter.
Factory goods orders declined 0.8%, pulled down by softening demand for transportation equipment, computers and electronic orders, and primary metals. Orders increased 1.3% in March.
Manufacturing, which accounts for about 12% of the economy, is being squeezed by businesses placing fewer orders while working off stockpiles of unsold goods in warehouses.
The sector could see more disruptions to the supply chain after Trump announced last week that he would impose a tariff on all goods from Mexico in a bid to stem the tide of illegal immigration across the U.S.-Mexican border. The tariff would start at 5% on June 10.
Manufacturers are still digesting the White House’s decision in early May to slap additional tariffs of up to 25% on $200 billion of Chinese goods, which prompted retaliation by Beijing.
The trade war, together with the inventory bloat that is concentrated in the automotive sector, could keep manufacturing on the backfoot. A survey on Monday showed a measure of national factory activity dropped to a 31-month low in May, with manufacturers worried mostly about the trade tensions.
Inventories at factories rose 0.3% in April. The stock of unsold goods has increased in seven of the last eight months. Shipments of manufactured goods fell 0.5% in April, the largest drop since April 2017, after rising 0.2% in March.
The inventories-to-shipments ratio increased to 1.37 from 1.36 in March. Pointing to further weakness in manufacturing activity, unfilled orders at factories slipped 0.1% in April, reversing March’s 0.1% rise.
Boeing’s move to cut production of its troubled 737 MAX aircraft is also hurting manufacturing.
The economy is broadly slowing despite the lowest unemployment rate in nearly 50 years. The Atlanta Federal Reserve is forecasting GDP rising at a 1.3% annualized rate in the second quarter. The economy grew at a 3.1% rate in the January-March period.
In April, orders for computers and electronic products fell 0.5%, while those for primary metals dropped 1.1%. Machinery orders rose 0.3%. Orders for electrical equipment, appliances and components increased 0.9%.
Transportation equipment orders tumbled 5.9% after rising 6.0% in March. Orders for civilian aircraft and parts plunged 25.2%. Motor vehicles and parts orders fell 1.7%, the biggest drop since July 2017.
The Commerce Department also said April orders for non-defense capital goods excluding aircraft, which are a measure of business spending plans on equipment, declined 1.0% instead of the 0.9% drop reported last month.
Orders for these so-called core capital goods rose 0.3% in March. Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, were unchanged as previously reported.
Core capital goods shipments fell 0.6% in March. Business spending on equipment contracted in the first quarter for the first time in three years.