US Services Sector Activity Experiences Largest Contraction In Over 4 Years: Gold Rallies, Dollar Tumbles As Traders Raise Rate Cut Bets

Business sentiment in the U.S. services sector plummeted in June, missing economic estimates by a wide margin and indicating that the pace of economic growth slowed down markedly at the end of last quarter.

The Purchasing Managers’ Index for the services sector, as measured by the Institute for Supply Management (ISM), marked the worst contraction since May 2020.

June ISM Services PMI Report: Key Highlights

• The ISM Services PMI fell from 53.8% to 48.8% in June, sharply below market expectations of 52.5% as monitored by Econoday.
• The subindex for Business Activity fell from 61.2% to 49.6% in June.
• The subindex for New Orders entered contraction after 17 straight months of expansion, falling from 54.1% in May to 47.3% in June. The outcome fell short of the 53.6% expected.
• The subindex for Prices Paid eased from 58.1% to 56.3%, slightly below the predicted 56.7%, indicating a marginal improvement in price inputs paid by services providers.
• The subindex for Employment contracted at a faster pace compared to May, falling from 47.1% to 46.1%, missing the expected 49%.

Chart: Services Sector Activity Tumbles The Most Since May 2020

“The decrease in the composite index in June is a result of notably lower business activity, a contraction in new orders for the second time since May 2020 and continued contraction in employment.” Steve Miller, chair of the ISM Services Business Survey Committee, said.

Miller highlighted that survey respondents report flat or lower business conditions, and while price pressures are fading, “some commodities have significantly higher costs.”

Respondents also indicated that the weaker supplier delivery performance is attribute to transportation challenges, and not to demand gains.

Also read: Private Employers Add 150,000 Jobs In June, Less Than Expected: Job Growth ‘Solid, But Not Broad-Based’

Market Reactions: Stocks Hold Gains, Bond Yields Rise Again

U.S. stocks inched higher in reaction to the bleak ISM Services PMI report, bond yields fell markedly, and the dollar weakened as traders raised their wagers on upcoming Fed interest rate cuts.

• The S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust SPY, was 0.2% higher at 10:15 a.m. in New York.
• The tech-heavy Invesco QQQ Trust QQQ rose by 0.2%.
• The blue-chip SPDR Dow Jones Industrial Average ETF DIA was flat.
• Long-dated Treasury yields saw sharp declines, with the 30-year yield down by 9 basis points to 4.52%, pushing the iShares 20+ Year Treasury Bond ETF TLT up by 1.4%.
• The U.S. dollar tumbled, with the Invesco DB USD Index Bullish Fund UUP, down 0.5%.
• Gold, as tracked by the SPDR Gold Trust GLD, rallied 1.5%.

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