The U.S. economy is strong, but it is premature to cut interest rates.

🖋 The U.S. economy is strong, but it is premature to cut interest rates.

The ISM Manufacturing Purchasing Managers' Index (PMI), recognized as the leading economic index of the U.S. economy, has been unexpectedly strong, raising questions about whether the Fed's June rate cut is reasonable.

Manufacturing PMIs have moved above 50 for the first time in 16 months and are out of contraction territory. In particular, the fact that corporate inflation is rising again, with input prices soaring to near two-year highs since July 2022, has sent some shockwaves through the market.

Government bond rates jumped right away and the possibility of a June rate cut sank. It still maintains expectations with bets above 60%, but the possibility of two rate cuts a week ago has disappeared, and the possibility of a rate hike has popped up instead.

It's noteworthy that the 10-year Treasury yield is above 4.31%, threatening this year's high. This is something that could serve as a pretext for a correction for the stock market, given that interest rates are more likely to rise if they break through their highs.

This week, the market is paying attention to the employment report, which will be released on Friday. In addition, this week, the actual employment data continues to pour in, from ADP to Challenger job cuts reports and JOLTs job openings. As it is one of the Fed's two major policy goals, it is expected to be an important catalyst to move the market.

The problem right now is that the ISM indicators have shown that inflationary pressures are rising again as the economy in general begins to recover. The fact that inflationary pressures are increasing is not very positive, given that corporate prices can consequently be passed on to consumers.

If it's positive, growth can overcome interest rate pressures. If growth can accelerate even with higher interest rates, the market has room for further increases. Of course, the clues to this will be shown in the earnings season. In particular, it's optimistic that Wall Street's recent opinion is that other companies' profit growth will be stronger than that of Magnificent 7.