Bad news is bad news again as ISM services print increases stagflation risks

Major US equity indices took a leg lower on Tuesday, weighed by the weaker-than-expected July ISM (Institute for Supply Management) services PMI (Purchasing Managers’ Index) report. This marked a notable shift from Monday's dynamic, where 'bad news proved good news' and lifted equities. However, Tuesday witnessed a reversion to the more traditional 'bad news is bad news' paradigm following the underwhelming ISM release. The S&P 500 fell 0.5% (down 30 points to 6,299), the Dow Jones erased 0.1% (losing 61 points to 44,111), with the Nasdaq 100 dropping 0.7% (shedding 170 points to 23,018). The US dollar ended the day off its best levels (but largely unchanged), with US Treasury yields bear flattening (yields were largely bid on the front-end of the curve).

Ultimately, the July ISM services PMI print defied expectations for a second consecutive monthly increase to 51.5 (per LSEG consensus), instead falling to 50.1 from June's 50.8 reading. Particularly concerning was the persistence of inflationary pressures, evidenced by the prices paid component jumping to 69.9 from 67.5, while the employment index deteriorated to 46.4 from 47.2. These developments collectively amplify stagflationary risks within the services sector. This follows last week's similarly disappointing July manufacturing PMI, which signalled deeper sectoral contraction and reinforced the market's anticipation of a faster pace of Fed easing. Market pricing was largely unchanged following the ISM services news – it seems investors have priced in ‘plenty’ for now. A 25-basis-point (bp) cut remains in play for September’s meeting, with nearly 60 bps of easing implied for the year-end.

There is limited tier-1 event risk ahead today, with focus shifting to the Bank of England’s (BoE) rate decision tomorrow. I will publish a more in-depth preview ahead of the meeting, but suffice it to say, investors have assigned a 94% probability that the BoE will reduce the bank rate by 25 bps from 4.25% to 4.00%.

In other news

On the tariff front, India remains on US President Donald Trump’s radar, with the President announcing plans to increase tariffs on Indian imports beyond the current 25% rate within 24 hours on the back of India's continued purchases of Russian oil as ‘fuelling the war’ in Ukraine. Despite India offering zero tariffs on US goods, Trump deemed this insufficient due to the oil issue. India defended its position, noting it imports over a third of its oil from Russia and arguing that stopping these purchases could destabilise global oil markets and drive prices higher. The Indian government also pointed out the hypocrisy of being singled out, highlighting that the EU conducted US$78 billion in trade with Russia in 2024, while the US continues importing Russian uranium, palladium, and other materials. This escalating trade dispute represents a sudden deterioration in US-India relations since Trump's initial tariff announcement on 31 July, raising concerns about potential economic impacts on India.

Stateside, with Governor Adriana Krugler’s unexpected resignation announcement that she will leave her post earlier than expected on 8 August – her term was originally due to end on 31 January 2026 – Trump announced that he will decide on a new Fed Governor by the end of the week. Also recently hitting the wires, Trump noted that US Treasury Secretary Scott Bessent has said he does not want to be nominated for the role of the new Fed Chair. Four people are in the running for the new Fed Chair spot, according to Trump, and with Bessent not in the frame, we have the ‘Two Kevins’ – Kevin Hassett and Kevin Warsh – as well as the currently serving Fed Governor, Christopher Waller, but the identity of the remaining candidate is unclear.