US Services Sector Signals Strong Growth, Beats Expectations, Amplifying Rate Hike Concerns

The U.S. economy continues to demonstrate impressive resilience, as indicated by the robust performance of the ISM Services PMI, which exceeded expectations in June.

While expansion in the service sector is generally viewed as positive news by financial markets, this strong data has heightened concerns about potential interest rate hikes. These concerns were further exacerbated on Thursday by the remarkably high ADP employment growth in June.

ISM Services PMI For June: What You Need To Know

• The gauge for the service sector climbed to 53.9 points, surpassing the previous reading of 50.3 in May and outperforming the projected increase of 51.

• This marks the sixth straight month of expansion for the U.S. non-manufacturing sector, and the highest since February 2023.
  
• In June, the subindex for business activity and production increased by 7.7 points to 59.2, indicating the 37th consecutive month of expansion.
  
• Employment rose 3.9 points to 53.1, entering expansion territory, while new orders grew at a faster pace by 2.6 points to 55.5.
  
• New export orders rose by 2.5 points to 61.5, while imports grew by 4.6 points to 54.6.
  
• Backlog of orders (43.9) and supplier deliveries (47.6) were the only two subindices showing a contraction last month.
  
• The subindex for inventory sentiment saw the largest drop for the month, declining 7 points to 54, but still signaling expansion.

• According to Anthony Nieves, chair of the Institute for Supply Management Services Business Survey Committee, "there has been an uptick in the rate of growth for the services sector. This is due mostly to the increase in business activity, new orders and employment. The majority of respondents indicate that business conditions remain stable; however, they are cautious relative to inflation and the future economic outlook."

Chart: ISM Non-Manufacturing PMI Rises In June

Market Reactions: Traders Now Fear Fed Will Hike Twice In 2023

A July rate hike by the Federal Reserve has essentially become a done deal, with traders assigning a 93% probability to this outcome.

As of this writing, the probability of a further rate hike in September have increased to 27.7%, up from 18% Wednesday.

Equity markets were under pressure Thursday, with the S&P 500 ETF Trust SPY down 1.3%.

The two-year Treasury yield surged above the 5% mark, rising to levels unseen since June 2007.

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