Manufacturing, Construction Slowdown Trigger Broad Sell-Off

The finish line is finally in sight for the Fed’s marathon race toward rate cuts and a soft landing. Maybe some last-mile anxiety was inevitable.

Tuesday brought a double dose of mildly foreboding data, with both manufacturing and construction spending coming in softer than expected in August and July, respectively. The downbeats were enough to stoke fears of a broader downturn and to trigger, in part, the worst day on the markets since the near-meltdown seen almost exactly a month ago. The closer we get to that widely-expected rate cut, the more and more necessary it seems.

Can You Build it?

Construction spending fell 0.3% in July compared to June, when spending stayed constant, according to data released Tuesday from the US Commerce Department’s Census Bureau. That was lower than expectations (though it still marked a nearly 7% jump year-over-year), and is largely thanks to high mortgage rates and overall high costs of homeownership constricting demand. Concurrently, data released Tuesday from the Institute for Supply Management showed that manufacturing in the US contracted in August for the fifth straight month as manufacturers continue to face higher and higher input prices.

One piece of bad news may have been priced in. But two? That makes the approaching soft-landing zone look smaller and smaller. “There wasn’t anything encouraging in the data,” Ian Lyngen, head of US rates strategy at BMO Capital Markets, told the Financial Times. On the markets, that pessimism reared its ugly head:

• The S&P 500 closed down 2.1% Tuesday, while the tech-heavy Nasdaq Composite index plummeted around 3.3%. Nvidia, which took a pounding last week after a mildly disappointing earnings call, fell nearly 10%. 
• The VIX, or Wall Street’s fear index, soared 33%, though it remains around half as high as it was a month ago. Meanwhile, Brent crude futures fell nearly 5% to below $74 per barrel, erasing all the gains seen in 2024 in the process.

Rate Your Turn: Ironically, the slowdowns in both manufacturing and construction could likely be explained at least in part by contractors waiting for the rate cut before pushing ahead with expensive plans. Meanwhile, one more jobs report is expected this Friday, ahead of the Sept. 17 Fed meeting. That could influence whether Jerome Powell and co. cut interest rates by a quarter or a half-point, as well as how quickly they continue to cut in the rest of the year’s meetings. Ahead of the jobs data dump, we suggest the 4-7-8 breathing technique.