With Asia and Europe on holiday, US equities sold off at the end of the Wednesday session as the market struggled to make sense of the Federal Reserve’s policy stance.

Traders appeared to read a marginally less dovish stance into remarks by Fed Chair Jerome Powell at his press conference this afternoon.  Powell appeared to struggle to say as little as possible, but he did seem to rule out a preventative cut in interest rates.

It took the stock market two hours after Powell’s appearance to react. The end-of-day selloff once again points to the stock market’s dependence on easy money.

The market is having difficulty working out the vector sum of the economic crosswinds hitting the market. As I reported April 28, the 3.2% headline number for 1st quarter GDP growth shrinks to about 0.7% underneath the fluff.

Wednesday’s reports were just as contradictory. Private payroll employment grew in April by 275,000, according to Automatic Data Processing, much higher than expected. But the Institute for Supply Management’s Purchasing Managers Index for US manufacturing fell to the lowest level since 2016.

Two quite different things are at work. The biggest contributors to employment growth in the past two years have been medium-sized businesses with between 50 and 499 employees, according to the detailed ADP data (dashed line). Large companies with 1,000 or more employees have contributed only a fraction to total employment (dotted line). A big shift in relative contribution occurred after the Trump Administration’s 2017 corporate tax cut.

It seems clear that the combination of tax cuts and deregulation (or at least the promise of deregulation) has lifted the spirits of American entrepreneurs. Hiring has been strong, but it is concentrated in lower-paid, labor-intensive jobs in smaller businesses. That helps explain why overall wage growth has been moderate, although wages are rising for lower-paid occupations: the composition of the labor force is shifting towards lower-wage employment.

Meanwhile, the disappointing PMI number suggests that the rate expansion of American manufacturing has fallen back to the low level that prevailed before Trump was elected. The PMI of 52.8 means that 52.8% of survey respondents are expanding and the remainder are contracting. The consensus estimate for the manufacturing PMI was 55.

There was no disagreement among market commentators as to the source of weakness in manufacturing. Export and import trade both are contracting, with their respective indices below the 50% mark.