Stocks Extend Losses Despite Gain in ISM Services Data

Still taken aback by the pre-holiday employment figures, markets opened lower Monday morning and continue to fall an hour into the session. Even a better-the-expected services report at 10 am wasn’t enough to drag any of the three indexes into the black.

As of 10:35, the Nasdaq is down 1.40% to 1771, while the S&P is off 1.00% to 887, and the Dow is 0.53% lower at 8237.

The only data release for the day was the ISM-Non Manufacturing Index, but markets shrugged it off and extended their losses even though it came in higher than forecasts.

Six service industries including Real Estate were growing in the month of June, the ISM index revealed, rising 3 points to a score of 47.

The index covers the services, financial, and construction industries. A score below 50 indicates overall contraction, but analysts were only expecting a score of 46. 

The six industries reporting growth in June, listed in order, are: Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Accommodation & Food Services; Finance & Insurance; Construction; and Information.

Details were mostly positive compared to May:

• New Orders, which measure future activity, rose 4.2 points to 48.6.
• Production soared 7.4 points to 49.8, almost ending 9 months of contraction.
• Employment moved up 4.4 points but continues to struggle at 43.4.
• Inventories were cut back 2 points to 45.0.
• Prices increased 6.8 points to 53.7, meaning inflation is still pretty flat.
• Exports were in growth mode, moving up 7.5 points to 54.5
• Imports fell 1 point to 47.0.

Economist Jennifer Lee from BMO Capital Markets noted that this third month of improvement was the biggest move in more than a year, and it pushed the index to its highest level since September.

“So take heart in the fact that yes, we're in a recession, but at least the pace of contraction is slowing, despite what the payroll report may have suggested,” she said.

In contrast, Deutsche Bank’s Joseph LaVorgna said the improvement may reflect nothing other than the fact that stocks performed well last month.

“Most economic sentiment indicators–and this is one of them–have improved dramatically on the back of higher equity prices,” he said. “Obviously if equity prices correct, so too will these indicators.”

LaVorgna said harder data indicates that a soft-landing scenario is out of grasp. “Going forward, the lack of any private income creation, apparent from June employment, will be a major depressant on the economic recovery, which is expected to the most sluggish on record.”   

The report is often used to forecast the monthly employment figures, so it received less attention than usual as those numbers were already posted last Thursday. 

No other data comes out today, and tomorrow and Wednesday are both light, so it’s unclear if markets will be able to find some bounce before the Trade Balance figures are released Friday.

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