The ISM Services PMI has posted a larger than expected decline with and this negative surprise gives further evidence to the argument that the US economic recovery has peaked in Q2. This came after the unofficial PMI, the IHS Markit Composite fell back sharply to 63.7 in June (from 68.7). Although these surveys continue to show the US economy in expansion, there is a feeling that the acceleration in the economic recovery is now slowing.   

ISM Data

Digging a little deeper into the ISM Services data series shows that there is a key issue that remains in the US, one of a supply constraint in the labor market. Both the ISM Manufacturing and Services data now shows the Employment component below 50 (very slight contraction). 

Add this to continued pricing pressures (the ISM Services Prices Paid component fell slightly to 79.5 but continues to reflect considerable pressure on input prices). The only crumb of comfort on the inflation front is that the Prices Paid dipped from last month’s 15 year high of 80.5.

So if employment is no longer expanding and prices are rising, this is a combination that the Federal Reserve will not enjoy as it looks to exit from its emergency monetary policy. 

Market reaction: Mildly risk negative

  • USD initially weakened in the first few minutes but has since begun to regain some of its strength.

  • S&P 500 futures have dropped by around -10 ticks.