ISM Services Data Raises Stagflation Concerns

Yields climb on services sector data and a weak Treasury auction. UST yields closed 2-5 bps higher, with the 2-year yield now at 3.72% and the 10-year yield at 4.21%. The move was partially fueled by ISM services data, which came in below expectations and highlighted inflationary pressures that may force the Fed to further delay rate cuts. Subdued demand at a $58B 3-year Treasury auction ahead of upcoming four week, 10-year, and 30-year auctions also contributed to the upward move. Futures markets are now pricing in a 94% chance of a rate cut in September, down slightly from 97% yesterday. Meanwhile, WTI fell 1.73% today to $65.16/barrel as it was rumored that Russia is considering an air truce with Ukraine.

July ISM services remained in expansionary territory despite slowdowns in key categories. Headline ISM services today came in at 50.1, missing the 51.5 consensus forecast and falling from last month’s level. The report’s employment gauge showed a contraction to the lowest level in four months. Combined with Friday’s weak nonfarm payroll report, recent data has reinforced concerns about a slowing labor market. Meanwhile, the prices paid index surged to 69.9, the highest reading since October 2022. Some point to Trump’s previously uncertain tariff policy as a driver for the rise in input costs in the services sector. These diverging numbers, presenting both a weakening labor market and elevated inflation, raise questions about whether the economy is entering a stagflationary environment.

Bessent out of the running for Fed Chair. On CNBC this morning, President Trump stated that Treasury Secretary Scott Bessent was no longer under consideration to replace Fed Chair Jerome Powell when his term ends in May. Trump said the move came at Bessent’s request, as he expressed a desire to “stay where [he] is.” The President also discussed possible names to fill Adriana Kugler’s seat on the Fed Board of Governors, stating there are now four candidates in the running, including Kevin Hassett, the top White House economist, and former Fed governor Kevin Warsh. The other two names have not been released, though Trump is expected to announce his pick in the coming days. According to the President, the appointee will finish out the remaining five months in Kugler’s term, but could potentially go on to fill the chairmanship come spring.