MACRO: US labour market weakens

• ISM employment subindex fell most since covid collapse
• US job openings plunged by whooping 427K

The ISM Services PMI dropped to 55.3 in June from 55.9 in the previous month, but topped analysts’ estimates of 54.3. Deceleration was caused by weak new orders reading (55.6 vs 57.6) and a significant fall in employment (47.4 vs 50.2). On the flip side, business activity rose considerably (56.1 vs 54.4) and price pressures eased for a second month (80.1 vs 82.1). At the same time inventories contracted for the first time since January 2022 (47.5 vs 51). Still, the outlook is gloomy as "logistical challenges, a restricted labor pool, material shortages, inflation, the coronavirus pandemic and the war in Ukraine continue to negatively impact the services sector”, according to Anthony Nieves, Chair of the ISM Services Business Survey Committee. The Inventory Sentiment Index (46.2 vs 44.5) contracted in June for the fourth consecutive month, indicating that inventories are in ‘too low’ territory and insufficient for current business requirements according to Institute for Supply Management

ISM Services PMI for June falls but remains in growth mode. Source: Bloomberg via ZeroHedge

Overall the report is not bad, however sub-indices from the labor market point to problems. Source: ISM

Weak ISM employment figures coupled with disappointing JOLTS report (job openings in May tumbled by massive 427K , to 11.254 million, which is the biggest revised one-month drop since the covid crash) point to weakening labour market which is bad news for FED. In the past few months the central bank has repeatedly emphasized strength of the labour market and thus the need to raise interest rates. Today's ISM report should lower expectations for a solid NFP reading on Friday, taking into consideration that most Americans work in the service sector. However, it is hard to say whether the weakening labor market will cause the FED to reduce interest rate hikes this year.