Service Sector Expands In April

Treasury yields inch higher after ISM services data. Treasury yields rose today, led by the long end of the curve, with the 2-year yield rising ~1 bp to ~3.83% and the 10-year closing ~4 bps higher at ~4.34%, after the service sector grew more than expected in April. Still, resurgent trade-war fears prevented a broader risk-on move today, despite President Trump saying yesterday that trade deals could be reached this week. Major equity indices fell ~0.20% – 0.75%, ending a streak of gains over the past couple weeks, while the dollar weakened against most major currencies.

Service sector activity expands in April, but costs rise. Per ISM data released today, the U.S. service sector expanded at a faster pace than expected, reversing a slump in March. The overall services index landed at 51.6, above expectations of a 50.2 result, and above last month’s 50.8 print. Among sub-indices reported by the survey, in focus was the prices paid index, which climbed from 60.9 in March to 65.1, above expectations of a more muted increase to 61.4, largely due to tariff related price pressures in the service sector. ISM Services Business Committee chair Steve Miller said, “Regarding tariffs, respondents cited actual pricing impacts as concerns, more so than uncertainty and future pressures,” indicating that higher prices are already materializing.

President Trump says China tariffs are temporary. In an interview yesterday, President Trump indicated that recently imposed tariffs on China aren’t meant to be permanent. He said, “At some point, I’m going to lower them because otherwise, you could never do business with them.” The comments raised hopes that the U.S. may reach trade deals soon, in addition to the President saying that deals with some trading partners “could very well be” announced as soon as this week. The President didn’t offer additional specifics, however prior comments from the administration point to India, Japan and South Korea as likely candidates for the first trade agreement.