Service Sector Flexes its Muscle

Rates little changed despite strong service activity data. Despite the strongest services PMI in over two years, swap rates closed nearly flat today. Rates closed little changed on the week as well, as lower than expected retail sales on Tuesday largely offset Monday’s manufacturing-inspired ~7bp climb. Meanwhile, today’s “triple witching”, where a high volume of equity derivatives, options, and futures expire simultaneously, saw ~18B shares traded on US exchanges, over 55% above the 3m average.

U.S. service sector growth hits ~2-year high. Initial S&P PMI data for June showed that service sector growth exceeded expectations (55.1 act. vs. 54.0 est.) and climbed to the highest level since April 2022. According to S&P’s chief business economist, the growth was “broad-based” and driven by “rising demand” throughout the economy. Aided by manufacturing sector growth as well, the composite index climbed to a 26-month high of 54.6, slightly higher than May’s 54.5 reading. Looking ahead, future service sector sentiment reached a five-month high.

Japan inflation climbs to 2.8% in May. Rate hike bets for the BOJ were further supported today after inflation accelerated to 2.8% from 2.5% in April. The data was tied for the highest rate of price growth since October, and inflation has remained over the stated 2% goal since April 2022. Meanwhile, core inflation (excluding food costs) rose for the first time in three months, now at 2.5% from 2.2%. The BOJ recently noted that rate hikes may continue in July, though concerns about lagging wage growth could prevent the move.