【MACRO Alert】The U.S. manufacturing sector shrank, causing a market shockwave and a drop in the Asia

The manufacturing activity in the United States continued to shrink for the fifth consecutive month in August, indicating a faster decline in orders and output. The Institute for Supply Management (ISM) Manufacturing PMI index slightly increased by 0.4 points to 47.2, remaining below the 50 threshold for the fifth consecutive month. Hard data such as manufacturing production and business equipment spending suggest that the manufacturing sector is essentially at a standstill. The ISM Manufacturing New Orders Index fell to 44.6, hitting a 15-month low; production further declined, with the production sub-index dropping to 44.8. Despite the low demand for orders, manufacturers are facing rising prices for input products, possibly due to soaring freight costs.

Concerns about the world's largest economy have once again heated up. Chip stocks, especially NVIDIA's, suffered a significant blow, leading to a substantial drop in the U.S. stock market. This trend is also evident in the Asia-Pacific region's stock markets, which saw a notable decline in early trading. As of now, the Nikkei 225 index has plummeted by 4% to 37,126.52 points, which could be the largest single-day drop since the market crash on August 5th. The Topix index also fell by 3% at one point, with energy stocks experiencing the largest drop, echoing the significant decline in crude oil futures prices from the previous trading day. South Korea's KOSPI index opened down 2.8%, and the MSCI Asia Pacific Index also fell by more than 1%. Driven by a risk-averse sentiment, the yen's exchange rate surged significantly, with the U.S. dollar to yen exchange rate breaking below 145, with a daily drop of 0.32%.

Additionally, European and American stock index futures have also shown a clear downward trend, with the Dow Jones Industrial Average futures down 0.2%, the S&P 500 futures down 0.3%, and the Nasdaq 100 futures down nearly 0.5%. In Europe, the Stoxx 50 futures fell 0.65%, the FTSE 100 futures fell 0.49%, and the DAX futures fell 0.63%. At the beginning of September, the S&P 500 and the Nasdaq 100 experienced the worst start since 2015 and 2002, respectively. With inflation expectations remaining stable, market participants are beginning to pay more attention to the actual health of the economy, as any signs of economic weakness could prompt policymakers to speed up the pace of easing monetary policy.

Although interest rate cuts are usually good news for the stock market, the situation may be different in the context of the Federal Reserve's eagerness to avoid a recession. Traders currently expect that the Federal Reserve may cut interest rates by more than two percentage points over the next 12 months, which would be the largest cut since the 1980s, except during recession periods. Analysts Ian Lyngen and Vail Hartman from BMO Capital Markets pointed out that the recently announced rise in unemployment rates may make traders uneasy before the release of Friday's non-farm employment data.

Jason Pride and Michael Reynolds from Glenmede stated that while this week's employment report is not the only basis for decision-making, it could be a key factor affecting the Federal Reserve's decision to cut rates by 25 or 50 basis points. If this week's employment report sends any moderate signals, it could become an important basis for determining whether the Federal Reserve will take more cautious or aggressive measures.Michael Wilson, a strategist at Morgan Stanley, who accurately predicted last month's market adjustment, stated that if Friday's employment data confirm the resilience of the economy, companies that lagged behind in the U.S. stock market rebound could be boosted. If the employment data are stronger than expected, it may bring greater confidence to investors, making them believe that growth risks have diminished.

According to the median estimate from a Bloomberg survey of economists, the employment report for August is expected to show that the world's largest economy, the United States, added about 165,000 jobs. Although this number is higher than the moderate increase of 114,000 in July, the average job growth in the last three months will slow down to just over 150,000, the lowest level since early 2021. The unemployment rate in August may slightly decrease from 4.3% to 4.2%.

Neil Dutta from Renaissance Macro Research stated that although the Federal Reserve may eventually decide to cut interest rates, he does not believe that a series of 25 basis point cuts will be enough to solve the problem. In this case, it will take longer for the fund rate to return to a neutral level, and during this process, the policy may remain restrictive, posing a downside risk to economic growth. He also pointed out: "This attempt to muddle through may lead to a further increase in the unemployment rate. Therefore, if they do not cut interest rates by 50 basis points in September, they will need to cut interest rates by 50 basis points later this year."

In this context, NVIDIA's stock price has suffered a record plunge, and to make matters worse, it is reported that the U.S. Department of Justice has issued an antitrust investigation subpoena to NVIDIA. The U.S. Department of Justice has issued subpoenas to NVIDIA and other companies to seek evidence of NVIDIA's violation of antitrust laws, reflecting an escalation of the investigation. Antitrust officials are concerned that NVIDIA is making it more difficult for customers to switch to other suppliers and punishing buyers who do not exclusively use its AI chips.

Since becoming the world's most valuable chipmaker and a major beneficiary of the AI spending boom, NVIDIA has been under close scrutiny from regulatory authorities. Sales have doubled every quarter, surpassing former chip industry leaders like Intel. In the investigation by the U.S. Department of Justice, regulators have been investigating NVIDIA's acquisition of RunAI announced in April this year. The company produces software for managing AI computing, and there are concerns that this collaboration will make it more difficult for customers to abandon NVIDIA's chips.

NVIDIA closed down 9.5% on Tuesday, with nearly $280 billion in market value evaporating, setting a record for the largest market value drop in U.S. stock history, with a total market value of $2.65 trillion. NVIDIA's plunge led the semiconductor stocks to put pressure on the U.S. stock market, coupled with new economic data that once again raised concerns about the health of the economy, and the U.S. stock market had a poor start in September, with technology stocks collectively plummeting. Analysts expect that NVIDIA's revenue in 2024 will increase from $16 billion in 2020 to $120.8 billion, with most of the revenue coming from its data center division. However, the most catalytic effect on the plummet of technology stocks is the new warning that the promise of AI reshaping the global economy is far from being realized, making it difficult to justify its high valuation.

The market expects the Federal Reserve to start cutting interest rates later this month, which should provide some relief. However, rising borrowing costs and uncertainties surrounding the November presidential election have prompted some companies to postpone capital expenditures and hiring. Despite this, a favorable development in the latest ISM data is that manufacturers' customers are managing their inventory levels better. As we enter the well-known seasonally weak period and the market has generally digested the expectation of an upcoming interest rate cut, it is not surprising to see some de-risking as investors wait for more data/clear messages. Although the market crash on August 5th alarmed global investors, the stock market rebounded almost immediately, with a cumulative increase of more than 5% by the end of August. NVIDIA itself was one of the leaders of the rebound, but as the Federal Reserve made it clear that it intended to cut interest rates, the rebound was particularly broad.

In the context of the current global economic volatility and uncertainty, the decline in U.S. manufacturing and the turmoil in technology stocks, especially the significant drop in NVIDIA, highlight market concerns about economic growth prospects. It reflects the complexity and uncertainty of the current economy. Although the market has given a certain optimistic sentiment to the Federal Reserve's interest rate cut expectations, investors still maintain a cautious attitude towards the high valuation of technology stocks and the commercialization process of AI technology. How the future of technology stocks will develop in the context of changing economic data and regulatory environment remains a focus of market attention.

In the face of these challenges, investors and companies must remain vigilant, closely monitor the trends in economic data, policy decisions, and global events, in order to make wise decisions in the ever-changing market. Although the market expects that the Federal Reserve's interest rate cuts may provide some relief, the actual effect of this measure, and its potential support for high valuation segments such as technology stocks, still needs further observation. In this process, all market participants should adopt flexible strategies to cope with economic fluctuations and market changes, while looking for opportunities and effectively managing risks to ensure competitiveness and profitability in the uncertain economic environment.