Latest / Markets with Megan: A Quick Financial Markets Update / Recession Red Flag: ISM Services Drop | S2 E050 | 06-04-25

Transcript

Recession Red Flag: ISM Services Drop | S2 E050 | 06-04-25 · Markets with Megan: A Quick Financial Markets Update

• 0:00
  Megan Horneman: We got further evidence from Economic Data today that the economy is weakening.
• 0:04
  Megan Horneman: It is Wednesday, June the 4th, and this is Markets with Megan.
• 0:06
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• 0:09
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• 0:12
  Megan Horneman: But we're here today to talk about the ISM Services Index, and this report is definitely an important report, one that we follow closely, because it measures the activity in the service sector in the US economy, and that is where the majority of our money is spent in the US is on the service sector.
• 0:31
  Megan Horneman: Now, this report showed that the service sector contracted for the first time in 11 months in May, and when we talk about contraction, it's when this index comes in at a level below 50.
• 0:42
  Megan Horneman: It came in at 49.9, which was also weaker than was anticipated.
• 0:45
  Megan Horneman: It was expected to comes in at a level below 50.
• 0:45
  Megan Horneman: It came in at 49.9, which was also weaker than was anticipated.
• 0:46
  Megan Horneman: It was expected to actually increase to a level of 52.
• 0:50
  Megan Horneman: So let's dig into what drove this report lower.
• 0:53
  Megan Horneman: First of all, it was new orders.
• 0:55
  Megan Horneman: We saw new orders contract significantly all the way down to 46, which is very well into contraction territory, and it was the worst reading on new orders since December of 2022.
• 1:07
  Megan Horneman: We also saw some evidence of an inventory overhang and this is concerning because if there's too much inventory, you see businesses actually reduce inventory and that actually detracts from economic growth in the future.
• 1:20
  Megan Horneman: We saw that the backlog of orders declines, meaning that backlog of orders are being cleaned out, and then inventory sentiment actually rose, meaning that inventories are higher.
• 1:30
  Megan Horneman: So there is evidence of this inventory overhang.
• 1:33
  Megan Horneman: The biggest concerning part of this report was in the prices paid component and that is an inflation indicator.
• 1:40
  Megan Horneman: We actually saw that rise significantly for the month.
• 1:43
  Megan Horneman: It was the highest level we've seen since November of 2022.
• 1:48
  Megan Horneman: And that's when we were really in the depths of some of the inflationary pressures we had after COVID, and it was also a time when the Fed was raising interest rates.
• 1:56
  Megan Horneman: Now what does this mean for the markets?
• 1:58
  Megan Horneman: The markets actually are relatively unchanged today, but on yields are lower, meaning prices are up, and that's because, with this weakness now in the service sector, it means the Fed might have some flexibility to cut interest rates in the second half of this year.
• 2:12
  Megan Horneman: The other thing is that the equity market is really just waiting for the very market moving event we get later this week, which is the payroll report, and that will be on Friday.
• 2:23
  Megan Horneman: That's all we have today.
• 2:24
  Megan Horneman: If you want a history of our podcast, you go to marketswithmeganfm.
• 2:28
  Megan Horneman: Thank you.