Good morning! It’s not everyday we turn to regional economic data, but a new Fed report out of Texas has turned heads for market-watchers. Was this email forwarded to you? Join 190,000 self-directed investors gaining an edge every morning. Sign up here. 

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Rate cuts could be closer than ever

The Texas manufacturing sector is calling for the Federal Reserve to cut interest rates.

While factory activity in the nation’s second-largest economy held firm in April, other measures of underlying hard and soft data deteriorated dramatically, according to the Dallas Fed’s latest regional report.

• New Orders Index plunged 20 points to -20.0

• Shipments Index fell to -5.5, entering negative territory the first time this year

• General Business Activity Index fell to its lowest since May 2020

• Company Outlook Index dropped to a new post-pandemic low

• Outlook Uncertainty Index spiked 11 points to 47.1

Taken together, the numbers point to a manufacturing hub buckling under tighter financial conditions and mounting tariff concerns.

“There is too much uncertainty, including a possible recession,” one Texas executive put it, according to the survey. “Interest rates are too high. The Federal Reserve always seems to be late for their own party.”

The manufacturing labor market also softened, with both the Employment Index and Hours Worked Index slipping into negative territory in April.

“We have already had to turn around and refuse shipments because customers cannot afford the tariffs, delaying our ability to build, which will eventually lead to job losses,” another survey respondent said, adding that the risks today are greater than those seen during the pandemic.

This is the kind of deterioration policymakers monitor. Cleveland Fed President Beth Hammack said earlier this month that rate cuts could come as soon as June if the economy shows convincing signs of slowing.

The Texas data strengthen that case.

“Please lower interest rates,” another Dallas business leader said. “We need it in order to boost the economy due to the uncertainty and tariffs.”

Meanwhile, inflation pressures continue to persist. The Dallas Fed reported that input costs surged in April, with the Raw Materials Prices Index climbing to its highest mark since mid-2022.

So the Fed finds itself embedded further in a familiar puzzle — weak growth, sticky prices, and political uncertainty.

James Fishback, the CEO of the investment firm Azoria, told me that interest rates remain too high even based on the New York Fed’s own projections and the central bank’s median forecast.

The so-called R-star rate — the natural rate that neither speeds up nor slows down the economy — is a full percentage point below current levels. 

“It’s not the Fed versus Trump,” Fishback said. “It’s the Fed versus its own estimates that say it’s now too restrictive.”

At the same time, investors are watching the same economic cracks and betting that the central bank will soon have no choice but to act.

Indeed, Morgan Stanley strategists told clients Monday that a sustained rally in the S&P 500 will depend in part on a more dovish Fed. 

If Texas is any indication, the Fed’s choice is clarifying by the day.

Market snapshot

Elsewhere

📊 A huge week of data ahead. Earnings will come from Meta, Microsoft, Apple, and Amazon. Meanwhile, the rest of the week will bring GDP, JOLTS, the Fed’s preferred inflation gauge, an update on home prices, and April’s non-farm payrolls report.

🚗 President Trump will soften the blow of auto tariffs. The White House is expected to prevent duties on foreign-made cars from stacking on top of other levies he has imposted, and to ease some tariffs on foreign parts used to build cars in the US. (WSJ)

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Rapid-fire

• Wall Street banks have sold the final batch of debt they lent for Elon Musk’s takeover of Twitter in 2022, selling $1.2 billion at 98 cents on the dollar (WSJ)

• The Treasury Department just raised its estimates for government borrowing this quarter (Barron’s)

• Bitcoin could surge to $120,000 in the second quarter, Standard Chartered forecasts (CoinDesk)

• Bulls keep cheering for a rare technical signal called the Zweig Breadth Thrust Indicator (MarketWatch)

• Spain and Portugal faced widespread power outages on Monday (CNN)

• Donald Trump Jr. co-founds a new private members club with a $500,000 fee (CNBC)

• Americans feel broke but their spending suggests otherwise (Opening Bell Daily)

Last thing

About me

📰 I’m Phil Rosen, co-founder and editor-in-chief of Opening Bell Daily. I’ve published books, lived on three continents, and won awards for my journalism, which has appeared in Business Insider, Fortune, Yahoo Finance, Bloomberg and Inc. Magazine.

I write our flagship newsletter to prepare you for each trading day, unpacking markets, economic data and Wall Street with analysis you won’t find anywhere else. Feedback? Reply to this email, ping me on X @philrosenn, or write me directly at [email protected].