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Wednesday, September 7, 2022
Today's newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.
Two readings on the U.S. economy diverged on Tuesday.
And it's not clear the economy can travel both roads.
Data from S&P Global and the Institute for Supply Management (ISM) offered wildly different overviews of the condition of the U.S. economy as of August. S&P's data suggested a continued fall into a "steepening downturn." ISM's data showed activity grew at a faster clip in August than July.
Both readings seek to capture activity in the services sector, which comprises about 80% of GDP growth. And both series are indexed to 50 — readings above this level indicate expansion, while readings below indicate contraction.
In August, the S&P Global U.S. services PMI index registered a reading of 43.7, suggesting activity contracted at the fastest pace since May 2020. Outside of the pandemic, that reading would be the worst since the 2008 Financial Crisis.
In August, the ISM's Services PMI index registered a reading of 56.9, up from 56.7 the prior month and pointing to continued growth in the services sector. Fourteen of the 16 industry groups tracked in the report grew last month.
"The gap between the headline indexes is now remarkably wide," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note on Tuesday, "but it is not clear how it will resolve."
In markets, when you're not sure what to think about something, price is often the best guide.
Our overly simple, stylized model of the world says in the stock market, lines going up mean good things are happening, while lines going down mean bad things are happening. In the bond market, lines going up mean the Fed is going to raise interest rates, while lines going down mean the Fed will cut interest rates.
Shortly after the ISM data was released, Treasury yields rose and stocks fell, a sign investors believed another strong reading on the economy sets the table for another 0.75% interest rate hike from the Fed later this month. Said differently: bad for stocks, more rate hikes from the Fed.
By day's end, the move in stocks had softened somewhat, but the moves in bonds had not: as of Tuesday's settlement, the 30-year Treasury bond yield stood at the highest since 2014 as new superlatives continue to be found all along the Treasury curve.
If Friday's jobs report left investors playing both sides of the "50 or 75 basis points" coin ahead of this month's Fed decision, Tuesday's action left investors asking fewer questions. Data from the CME Group on Tuesday suggested there's a 72% chance of a 0.75% rate hike from the Fed on Sept. 21.
Tuesday's market action says investors looked more closely at ISM's data than what S&P Global published. And it may not be enough to call these stories divergent: dissonant may be more like it.
As Shepherdson noted, both reports contained some oddities.
In the ISM's report, real estate was one of the sectors reporting growth last month. This comes despite a sharp pullback in the U.S. housing market when looked at from pretty much every angle.
Meanwhile, S&P Global's data showed business expectations for output hit a three-month high amid what was effectively a record low for the index.
"The resilience of the ISM services index remains in stark contrast to the alternative services PMI from S&P Global, which slumped to just 43.7 last month, leaving it consistent with a severe recession," Andrew Hunter, senior U.S. economist at Capital Economics, wrote in a note Tuesday. "But the latter is difficult to square with the latest hard data, while the regional surveys also point to economic growth slowing rather than collapsing."
So we turn to the market looking for answers.
And there we found something more substantial on Tuesday.
What to Watch Today
Economic calendar
7:00 a.m. ET: MBA Mortgage Applications, week ended September 2 (-3.7% previously)
8:30 a.m. ET: Trade Balance, July (-$70.2 billion expected, -$79.6 previously)
2:00 p.m. ET: Federal Reserve Beige Book
Earnings
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