Market Perspective

Services Sector Shines


Overview: Amid increased concerns that the spread of COVID-19 will slow global economic growth and a range of economic data that was roughly neutral overall, mortgage rates ended the week a little lower.

 

The COVID-19 variants have caused a surge in case counts around the world, which could again restrict some activities such as travel and eating out. If this takes place, it will slow economic growth and reduce future inflationary pressures. Since lower inflation is good for bonds, the possibility for reduced inflation has been favorable for mortgage rates.

A couple of significant economic reports released this week from the Institute of Supply Management (ISM) remained at very high levels. The Manufacturing Index fell to 59.5, which was a little weaker than the consensus forecast, but still very strong historically. Even more impressive, the Services Index unexpectedly jumped to 64.1, a record high. Levels above 50 indicate that the sectors are expanding. With the reopening of the economy, consumers have been shifting their spending from goods to services, and these reports provided further confirmation of this. It remains to be seen if the spread of COVID-19 will reverse this trend.


Gross domestic product (GDP) is the broadest measure of economic activity. During the second quarter, annualized growth was 6.5%, which was very strong by historical standards, but well below the consensus forecast of 8.5%. However, the details of the report indicated that the shortfall was almost entirely in areas that simply pushed growth into the future. Inventory drawdowns subtracted about 1.2% during the quarter, as supply shortages caused production delays in a wide range of items. These inventories will need to be replaced, adding to future economic activity. Consumer demand remained very strong, as personal consumption expenditures surged 11.8%. With the second-quarter growth, the size of the economy is now larger than before the pandemic.


Week Ahead

Looking ahead, investors will monitor comments from Federal Reserve officials for hints about the timing of future monetary policy changes and will track COVID-19 case counts globally. Beyond that, the monthly Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The Consumer Price Index (CPI) will come out on August 11. CPI is a widely followed monthly inflation report that looks at the price change for goods and services.

 

ISM Services Index

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