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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.