Stocks Had Their Pick of US PMI Data and Chose the Weak One
Stocks Had Their Pick of US PMI Data and Chose the Weak One
By:Ilya Spivak
Traders pointedly ignored a rosier service sector view from S&P Global
- Stock markets retreated as ISM data showed a weak US service sector.
- The report stoked worries about a slow Fed response to slowing growth.
- Despite all of these signs of slowing activity, prices grew at the fastest rate since October 2022.
The US service sector slowed to near-standstill in July, according to data from the Institute for Supply Management (ISM). The headline purchasing managers index (PMI) gauge fell to 50.1, a hair above the 50.0 “boom-bust” threshold separating expansion and contraction of economic activity.
The report’s internals looked troubling. Employment fell for a second consecutive month, and the pace of contraction accelerated to the fastest since March. Growth in new orders stalled while the backlog continued to shrink, supplier deliveries slowed, while both imports and exports flipped from expansion to contraction.
Stocks slip as ISM service sector data paints a dour picture
Despite all of these signs of slowing activity, prices grew at the fastest rate since October 2022. That seemed to speak directly to the very same concerns that so unnerved the markets last week: the US economy may be starting to slow in earnest, but the Federal Reserve will slow-walk its response in a bid to keep a lid on inflation expectations.
Not surprisingly, stocks took a turn lower once this data crossed the wires. The bellwether S&P 500 and the tech-tilted Nasdaq 100 swooned in tandem as the ISM report appeared, going on to close down 0.48% and 0.71% on the day, respectively.
Meanwhile, Treasury bonds rallied at the long end of the yield curve but stalled at shorter maturities. That seemed to echo the conclusion that the Fed will move slowly in 2025 even as it is forced to play catch-up with more aggressive stimulus downwind.
Are markets starting to trade with a bearish bias?
Indeed, benchmark Fed Funds futures now price in 52 basis points (bps) in cuts this year, which is broadly in line with what the US central bank has been projecting since December. However, whereas Chair Powell and company wrote down just 25bps in cuts for 2026 when they last updated forecasts in June, the markets are now betting on 76bps.
Perhaps most interestingly, traders pointedly ignored competing PMI data from S&P Global that painted a far rosier picture of US growth. It pointed to a booming services sector and the fastest overall pace of economic activity December 2024, even as it showed a deepening slump in manufacturing.
The ISM survey seems to be more recent, whereas the S&P Global version had preliminary figures published two weeks ago. Nevertheless, today’s “final” PMI reading saw those “flash” estimates revised higher, with the composite gauge up from 54.6 to 55.1. That markets still opted to trade on the ISM result may hint that a bearish bias is emerging.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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