KEY POINTS OF ISM SERVICES:
- June ISM services fall to 55.3 from 55.9 in May, beating forecast
- The services sector is slowing less than expected, suggesting that the economy may be able to avoid a near-term recession
- S&P 500 remains subdued despite positive ISM data as traders await FOMC minutes for clues on Fed tightening cycle
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A measure of U.S. business services activity rose in the 25e consecutive month in June, but continued to slow at the end of the second quarter, a sign that the economy is cooling amid growing headwinds, including dizzying CPI readingsa slowdown in demand and tighter financial conditions.
According to the Institute for Supply Management, its non-manufacturing PMI fell to 55.3 last month of 55.9 in May, remaining above the 50 level that separates growth from contraction, but showing the weakest expansion since May 2020. The median forecast from a Bloomberg News poll called for a bigger drop to 54.00 in the overall index.
Regarding the performance of certain components, production increased slightly to 56.1 from 54.5, but new orders fell to 55.6 from 57.6. At the same time, the employment indicator continued to fall, dropping from 50.2 to 47.4, a bad omen for the job market. Elsewhere, the prices paid index cooled to 80.1 from 82.1, signaling that input costs are falling, albeit very slowly and not at a fast enough pace to alter the Federal Reserve’s tightening plans.
Overall, the slowdown in services economy segmentwhere most Americans work and which accounts for about two-thirds of the US gross domestic productis a clear indication that the the recovery is weakening, but not at an alarming enough rate to suggest the economy is about to fall off the precipice.
While consumer spending was expected to flow to high-touch industries at the expense of goods spending, stubbornly high inflation will continue reduce real income and squeeze the household budgetreducing discretionary consumption. This situation will probably weigh on the services sector during the second half of 2022, increasing the likelihood of a recession later in the year or possibly in 2023.
Fears of a hard landing will prevent US Treasury yields from posting a meaningful rebound after the correction seen in recent days, as recession risks appear to outweigh inflation fears. In any case, growth concerns should have a deleterious effect on the equity market, but cyclical stockswhose wealth is linked to sound economic activity, is likely to suffer the most.
The S&P 500 remained subdued after the release of the ISM survey, down around 0.10% to 3,833, despite the release of a better than expected headline, as traders remained reluctant to take directional positions important before the June FOMC minutes, which will be published. this afternoon. The document could offer clues about the Fed’s tightening cycle and whether policymakers are seriously considering another 75 basis point hike at their July meeting.
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—Written by Diego Colman, Market Strategist for DailyFX