The ISM Manufacturing Index, which suggested price declines and an economic slowdown

The July U.S. manufacturing sentiment index was released. The market focused on the sharp drop in the price index.

This supported market view (hiking ⇒ economic slowdown & price cooling ⇒ rate cuts).

U.S. interest rates fell and the yen strengthened. A reversal of the yen carry trade may also be underway.

Meanwhile, the employment index remained strong, with little sign of hiring freezes or headcount reductions.

This supports the Fed’s stance (continued strength in the labor market implies solid overall demand and rising wage-cost pressures).

There is a gap between the market and the Fed’s view (stance), but from decades of experience, the market view is supported, and considering the nightmare of the 1970s, the Fed’s view cannot be discarded.

Anyway, the market will decide the prices.

The ISM manufacturing index suggests a slowdown in the economy and a decline in the inflation rate.

Indeed, since 1997, the correlation between the inflation rate and the ISM manufacturing price index has been high.
However, the Fed fears a replay of the 1970s when wage-push inflation occurred.

In addition, what the market used to bolster its view was an increase in inventories. It reached a high not seen since 1984.

Another factor determining prices, the wage-cost issue, remains.