The Institute for Supply Management's service-sector activity index dived back into contractionary territory in June, while the four-week average of initial jobless claims hit a nine-month high. As the latest batch of indicators, including the ADP employment report, bolstered the case for a near-term Federal Reserve rate hike, the S&P 500 rose moderately.
Fed Meeting Minutes
Minutes from the June 11-12 Fed meeting released after the market's abbreviated session ahead of July 4 also had a generally dovish tone.
"Participants highlighted a variety of factors that were likely to help contribute to continued disinflation." Those included easing of demand-supply pressures, wage trends, the delay of inflation gauges in reflecting rental market prices, and potential productivity gains from artificial intelligence.
There was also a general consensus that labor markets tightness had eased. Many participants noted that financial strains for lower- and moderate-income households, including rising delinquencies "were a significant concern."
There was one dissonant note, with some participants saying that insufficiently restrictive financial conditions and large fiscal deficits could keep inflation and growth higher than forecast.
ISM Services
The ISM service-sector index fell to 48.8 from 53.8, falling back below the 50 level consistent with flat growth. The ISM services activity or production index slid to 49.6 from 61.2.
Forward-looking indicators were even further in contraction territory. The employment gauge fell to 46.1 from 47.1. New orders dropped to 47.3 from 54.1, while the order backlog sank to 44 from 50.8.
While the survey looks bleak, keep in mind that the S&P Global services index, also released on Wednesday, rose to a 17-month high 55.3 from 54.8 in May. S&P Global said the growth rate in June was consistent with 2.5% GDP growth.
The disparity reflects the different survey group. The ISM tends to survey larger firms and includes retailers.
ADP Jobs Report
ADP's estimate of a net 150,000 gain in private-sector jobs last month trailed Wall Street's 161,000 forecast.
The payroll processing firm revised May's gain to 157,000 from the initially reported 152,000.
ADP's May report didn't come close to the Labor Department's official total of a 229,000 gain in private jobs. Including government jobs, the government estimated 272,000 new jobs in May.
Friday's official jobs report is expected to show that employers added 189,000 jobs in June, including 160,000 private-sector payroll jobs, according to Econday.
The unemployment rate is seen holding at 4%, while the 12-month rate for average hourly wage growth is seen dipping to 3.9% from 4.1%.
Initial Jobless Claims
New claims for jobless benefits rose 4,000 to 238,000 in the week through June 29. The four-week average of claims climbed 2,250 to 238,500. That's the highest in nine months.
Continuing claims for jobless benefits rose by 26,000 to 1.858 million in the week through June 22.
In a Wednesday note, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote that WARN notices ahead of plant closings and mass layoffs signal that initial claims could rise to around 270,000 per week soon, based on a Cleveland Fed analysis. However, initial claims will be hard to read for the next month or so amid expected auto industry retooling that temporarily shuts down production.
Fed Rate-Cut Outlook
Fed Chairman Jerome Powell said on Tuesday that the path two months of data show "we're getting back on a disinflationary path." But policymakers need at least a couple of more months of tame inflation data. Just how tame depends on what happens with the job market. An unwanted weakening of the labor market could prompt a quick pivot to rate cuts without more disinflation progress. However, strong job growth would probably require monthly increases of no more than 0.2% in the core PCE price index for the Fed to cut its key rate at the September meeting.
After the ISM index, jobless claims and the ADP jobs report, markets are pricing in 71% odds of a quarter-point Fed rate cut on Sept. 18, up from 65% before the releases, according to CME Group's FedWatch page. Markets now see 69% odds of two quarter-point cuts by the end of 2024, up from 61%.
Market Hits Highs Ahead Of Holiday, Jobs Data; 7 Stocks In Buy Areas
S&P 500
The S&P 500 rose 0.4% after the ISM, ADP jobs report and jobless claims in Wednesday stock market action. That marked the 33rd record close this year for the S&P 500, which is up 16.1% so far in 2024.
The 10-year Treasury yield slid 12 basis points to 4.36%.
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