Positive Turnaround in the U.S. Service Sector Supports Markets

The mood in the U.S. services sector returned to expansion mode in July, after plunging at a record pace in June since May 2020. This could alleviate recent market fears of an impending recession in the world's largest economy. The ISM Services Purchasing Managers' Index (PMI) rose from 48.8% to 51.4%, exceeding expectations of an increase to 51%. A similar services index, published by S&P Global, also confirmed expansion conditions for the U.S. private sector, albeit slower than anticipated. The S&P Global Composite PMI fell from 54.8 to 54.3, missing the forecasted increase to 55. The S&P Global Services PMI dropped from 55.3 to 55, also falling short of expectations for a rise to 56. Steve Miller, chair of the ISM Services Business Survey Committee, stated that the July increase in the Composite Index was attributed to an average rise of 5 percentage points in the indices for business activity, new orders, and employment, which was offset by a 4.6-point decline in the supplier deliveries index. Miller added that businesses are adopting a cautious stance ahead of the upcoming presidential elections, with one respondent expressing concern over potential tariff hikes. Respondents also reported that increased costs are impacting their businesses, although overall feedback on business activity is positive or gradually expanding. Chris Williamson, Chief Economist at S&P Global Market Intelligence, commented: "Another strong expansion in business activity in the services sector, which has experienced the best growth interval in over two years over the last two months, contrasts with the deteriorating picture in the manufacturing sector, where production nearly stalled in July." Global financial markets experienced a broad sell-off on Monday due to widespread investor concerns regarding U.S. economic growth following disappointing data from last week. The release of the ISM Services PMI has temporarily halted risk aversion and sparked an attempt at a market reversal. The U.S. Dollar Index (DXY) briefly rose after the release, although the broader dollar index, tracked by the Invesco DB USD Index Bullish Fund ETF, remained down by 0.5%. Major U.S. stock indices showed gains, reducing recession fears. The S&P 500, tracked by the SPDR S&P 500 ETF Trust, pared losses to 2.3%. Other significant movements following the PMI release included: The Nasdaq 100, tracked by the Invesco QQQ Trust, recovered by 500 points to 17,950, reducing its daily loss to -2.4%. The Japanese yen, tracked by the Invesco CurrencyShares Japanese Yen Trust, slightly turned against the U.S. dollar. Long-term Treasury bonds, tracked by the iShares 20+ Year Treasury Bond ETF, reduced their gains. Gold, tracked by the SPDR Gold Trust, extended its losses to -2%.