Treasury-bond prices fell and yields rose Tuesday after the Institute for Supply Management [ISM] reported that U.S. service industries grew in May more than they have in a year [see table], an indicator that the housing slowdown has not yet seeped into the overall economy. The ISM's non-manufacturing business index, which includes banking, retailing and construction, rose to 59.7 last month from 56.0 in April. Economists had forecast 56.0. (A reading above 50 indicates growth.) Non-manufacturing industries constitute about 90% of the U.S. economy. "It does look like growth is accelerating in the second quarter,'' said economist James O'Sullivan. "It certainly argues against the Fed easing any time soon." Goldman Sachs has stated it no longer expects the Fed to cut rates from 5.25%, and futures activity on the Chicago Board of Trade indicated that traders' expectation of a cut by the end of the year fell from 18% Monday to 12% Tuesday. The ISM's employment gauge rose to 54.9 from 51.9, inventories rose to 61 from 52, and backlogs fell to 48 from 50 in April. New orders were up to 57.4 from 55.5. Prices paid rose to 66.4 from 63.5 on "outrageously high" food and gas prices. Last week, the ISM reported a jump in the factory index to 55, the highest in over a year. Economist Julia Coronado: "The economy is returning to a strong expansionary mode."
Sources: Press release, Bloomberg, AFX News Limited, Wall Street Journal
Commentary: Goldman's Chief Economist Now Believes a Rate Cut is Unnecessary • Sideways Trading More Likely Than Downward Correction For U.S. Markets This Summer • Cognitive Dissonance Redux: Difficult To Get a Handle On An Economy in Transition
Stocks/ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
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