Service sector activity meter Contracts, stocks, bonds shrink profits: ‘Business slows down’ – Invesco QQQ Trust, Series 1 (NASDAQ:QQQ), SPDR S&P 500 (ARCA:SPY)

Services sector activity slowed sharply in April, cooling more than expected and posting the first decline since December 2022.

What happened: After fifteen consecutive months of growth, sentiment in the services sector began to shrink last month, according to the Institute for Supply Management (ISM).

April ISM Services PMI Report: Key Highlights

• The overall ISM Services PMI fell to 49.4%, down 2 percentage points from 51.4% in March and missed expected growth to 52%.
• The business activity sub-index fell to 50.9% in April, a significant decline of 6.5 percentage points from 57.4% in March.
• The New Orders sub-index continued to grow for the 16th month in a row, but at a slower pace. It fell from 54.4% in March to 52.2% in April, missing the expectation of 54.5%.
• The prices paid sub-index rose sharply from 53.5% to 59.2%, indicating worsening price pressures felt by service providers, missing the expected rise to 55%.
• The employment sub-index plummeted from 48.5% to 45.9%, missing the forecast 49%.

Anthony Nieveschairman of the Institute for Supply Management Services Committee, blamed the decline in the composite index in April on “lower business activity, slower new order growth, faster supplier deliveries and the ongoing contraction in employment.”

“Survey respondents indicated that overall business operations are generally slowing, with figures varying by company and sector,” says Nieves. “Employment challenges remain mainly due to difficulties in filling vacancies and/or controlling labor costs. The majority of respondents indicate that inflation and geopolitical issues remain concerns.”

Market Reactions: Stocks and Bonds Reduce Gains

Following ISM Services’ PMI data, market reactions saw stocks and bonds pare early morning gains, driven by a cooler-than-expected jobs report.

Traders interpreted the services sector indicator negatively as it indicated a contraction in overall activity combined with higher prices paid. This points to a stagflationary scenario characterized by reduced growth and persistently high inflation.

The tech-heavy Nasdaq 100, as followed by the Invesco QQQ Trust QQQ, eased its rally from 2.1% to 1.6% on the day. The S&P 500, as tracked via the SPDR S&P 500 ETF Trust SPYeased from an intraday high of 5,139 points to 5,110 points.

Government bond yields also reduced the decline: the two-year interest rate recovered from a decline of more than 10 basis points to a smaller decline of 5 basis points. The iShares 20+ year government bond ETF TLT rose 0.5% at 10:20 a.m. in New York, paring daily gains.

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Image: Midreis