Activity in the services sector experienced a sharp slowdown in April, cooling more than expected and showing the first decline since December 2022.

What Happened: After 15 straight months of growth, sentiment in the services sector activity entered into contraction 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%, marking a 2 percentage points decline from March's 51.4% and missing the expected growth to 52%.
• The subindex for Business Activity fell to 50.9% in April, marking a significant drop of 6.5 percentage points from March's 57.4%.
• The subindex for New Orders continued to expand for the 16th consecutive month, but a slower pace, declining from March's 54.4% to 52.2% in April, and missing expectation of 54.5%.
• The subindex for Prices Paid rose sharply from 53.5% to 59.2%, indicating worsening price pressures felt by services providers, and missing the expected rise to 55%.
• The subindex for Employment tumbled from 48.5% to 45.9%, missing the predicted 49%.

Anthony Nieves, chair of the Institute for Supply Management Services Committee, blamed the decline in the composite index in April on "lower business activity, slower new orders growth, faster supplier deliveries and the continued contraction in employment."

"Survey respondents indicated that overall business is generally slowing, with rates varying by company and industry," Nieves says. "Employment challenges continue to be primarily due to difficulties in backfilling positions and/or controlling labor expenses. The majority of respondents indicate that inflation and geopolitical issues remain concerns."

Market Reactions: Stocks, Bonds Trim Gains

Following the ISM Services PMI data, market reactions saw stocks and bonds trimming their early morning gains, influenced by a cooler-than-expected jobs report.

Traders interpreted the services gauge negatively as it signaled a contraction in overall activity along with higher prices paid, suggesting a stagflationary scenario characterized by reduced growth and persistently high inflation.

The tech-heavy Nasdaq 100, as tracked by the Invesco QQQ Trust (NASDAQ:QQQ), softened its rally from 2.1% to 1.6% on the day. The S&P 500, as monitored through the SPDR S&P 500 ETF Trust (NYSE:SPY), eased from an intraday high of 5,139 points to 5,110 points.

Treasury yields also trimmed declines with the 2-year yield recovering from a decline of over 10 basis points to a smaller one of 5 basis points. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) was up 0.5% at 10:20 a.m. in New York, scaling back daily gains.

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