February Services Sector Data Suggests Challenging Path Forward For The Fed

The SPDR S&P 500 ETF Trust SPY rallied on Friday after investors got two encouraging data points about the health of the U.S. services sector.

The Numbers: The S&P 500 Global U.S. Services PMI index increased from 46.8 in January to 50.6 in February, its highest level since June of last year.

Any level above 50 for the index is considered indicative of expansion. The latest U.S. services data follows similar data from the Eurozone and China signaling services sector growth in all three major markets.

In addition, the Institute for Supply Management’s services activity index dropped only slightly from 55.2 in January to 55.1 in February but exceeded consensus economist expectations of 54.3.

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The ISM survey found companies "mostly positive about business conditions." The survey noted elevated consumer spending and a healthy labor market, suggesting a U.S. recession is not imminent.

Rate Outlook: Unfortunately, strong economic data may put even more pressure on the Federal Reserve to continue to raise interest rates to prevent inflation. The Fed is attempting to cool the red-hot economy and ease pressure in a tight labor market to keep prices in check.

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The bond market is pricing in three more 0.25% Fed rate hikes in March, May and a 50.6% chance the fed fund target rate will rise to between 5.5% and 5.75% or higher by July, according to CME Group. One month ago, the market was pricing in a 0% chance rates would rise to that level.

Benzinga's Take: Investors are in a difficult position attempting to interpret economic data these days.

Inflation remains enemy number one, so the longer the economy remains hot, the higher interest rates will likely rise.

Photo: Peshkova via Shutterstock