LIVE MARKETS-Services shift into gear, labor market idles

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SERVICES SHIFT INTO GEAR, LABOR MARKET IDLES

The services sector lost some upward momentum last month.

The Institute for Supply Management's (ISM) non-manufacturing PMI USNPMI=ECI dropped 2.1 points to land at an even 54, weaker than the 54.9 analysts were looking for.

Even so, the index remains a robust four points north of 50, the line dividing PMI expansion from contraction.

Zooming in on the index's subcomponents, new orders improved by two points while employment plunged 6.6 into contraction territory. New export orders weakened while imports picked up steam.

Prices paid - an inflation predictor - surged 7.7 points to 70.7, the highest it's been since October 2022.

"The Prices Index increased, as expected, amid higher oil and fuel costs, and the Supplier Deliveries Index indicated slower performance compared to February, also unsurprisingly with shipping issues and flight disruptions due to the Middle East conflict and winter weather," writes Steve Miller, chair of ISM's Services Business Survey Committee.

"Continuing strength in business activity, new orders and backlog of orders are positive economic signals," Miller adds. "So the Employment Index dropping to its lowest level since December 2023 (43.5 percent) was a surprise."

On the other hand, S&P Global's final take on March services PMI USMPSF=ECI, released on Friday, provided a gloomier view of the sector. Its index was revised 1.3 points lower to 49.8, dipping into contraction.

PAYROLLS POST-MORTEM

The much-anticipated March jobs report fell on the Good Friday market holiday this year, leaving investors to stew over the results over the long weekend.

The U.S. economy unexpectedly added 178,000 jobs last month USNFAR=ECI, nearly triple the 60,000 analysts expected. Great news, right?

Well, February's job losses were also revised, to 133,000 from 92,000. A mere 45,000 jobs were added in the last two months, combined. That falls below the minimum gains needed to keep up with population growth/labor market entrants.

March was only the third month over the last 12 with a better-than-expected payroll number.

"Overall the U.S. economy was showing positive growth through the first quarter with average monthly payroll increases of 68k," writes Stephen Coltman, head of macro at 21Shares. "It is too soon to start seeing the impact of higher energy prices on the jobs data, and nothing in this report will change the Fed’s preference to stand pat and do nothing until the longer-term impact on the economy from the Iran conflict becomes clearer."

The report also gave markets their first glimpse at March inflation, showing average hourly wages rose by 0.2% on a monthly basis, a deceleration from February's 0.4%, and cooler than the 0.3% growth economists predicted.

Year-over-year, wages increased 3.5%, slower than both the previous month's 3.8% growth and the 3.7% consensus.

"With the recent uptick in inflation driven by energy prices, real wage growth is likely to decelerate further, putting increased pressure on consumers," says David Royal, chief financial and investment officer at Thrivent.

The jobless rate USUNR=ECI also defied expectations by edging down to 4.3%, but that might be at least partly attributable to a dip in labor market participation, from 62.0 to 61.9, the lowest reading since January 2022.

No surprise there. When folks leave the workforce they are no longer considered jobless, and the unemployment rate tends to creep lower.

(Stephen Culp)

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