While pandemic demand trends are boosting services spending amidst super charged appetites for travel, dining and other outdoor adventures, interest rate sensitivity is also a significant driver. While higher interest rates discourage consumer spending on durable goods that are often financed, services aren\u2019t pressured as much by the headwind.<\/strong><\/p>\n<\/blockquote>\n\n\n\n Economic data this morning depicted the ongoing spending shifts away from goods and towards services. While pandemic demand trends are boosting services spending amidst super charged appetites for travel, dining and other outdoor adventures, interest rate sensitivity is also a significant driver. While higher interest rates discourage consumer spending on durable goods that are often financed, services aren\u2019t pressured as much by the headwind.<\/p>\n\n\n\n This morning\u2019s Flash PMI release from S&P Global illustrates this trend. Manufacturing re-entered contraction territory after strengthening modestly in response to lower interest rates following the regional bank debacle in March. Manufacturing notched a reading of 48.5, much lower than the 50 expected and the 50.2 from last month. Services meanwhile, were on fire, expanding solidly by reaching a reading of 55.1, dwarfing forecasts calling for 52.6 and higher than the previous month\u2019s reading of 53.6.<\/p>\n\n\n\n For manufacturing the decline in new orders and prices weighed on the headline number. Services were propelled higher by new orders, prices and employment, which are driving investors to reconsider their Fed tightening expectations. Services are labor-intensive and drive core inflation, which is the most challenging kind of inflation to subdue.<\/p>\n\n\n\n Markets are lower this morning in response to the of lack of progress on the debt-ceiling and hawkish Fed rhetoric from a slew of Regional Fed Presidents including Kashkari, Bullard, Barkin, Daly and Bostic. The S&P 500 Index is down 0.3% after failing to conquer the 4200 level for the third day in a row. Cyclical and small-cap stocks are providing some relief however, as strong economic data from the service areas are quelling recession concerns while tech stocks get hit from higher rates. The Dow Jones Industrial Average is unchanged while the small-cap Russell 2000 Index is up an impressive 0.9%. Yields haven\u2019t provided relief in a while, however, with the 2 and 10-year Treasury yields up 6 and 2 basis points (bps) to 4.38% and 3.74% respectively. Higher Fed tightening expectations are also driving the dollar higher, with the Dollar Index up 0.3% to 103.46. Comments from Saudi Arabia\u2019s Oil Minister, Prince Abdulaziz bin Salman, are pushing oil prices higher this morning as he hinted that OPEC + may cut output again at its June 4 meeting. His comments were directed at short sellers that may be piling on bets against the commodity. WTI Crude Oil is up 1.4% to $73.06 per barrel as a result.<\/p>\n\n\n\n While businesses appear to be cautiously spending on technology, consumers are scaling back spending. These trends are illustrated by the following examples:<\/p>\n\n\n\n As the debt-ceiling standoff remains top of mind, it isn\u2019t the only headwinds investors are facing. JP Morgan Chase CEO Jamie Dimon told a group this morning that everyone should be prepared to see higher rates, because even though Fed rate hikes have been significant, markets remain flushed with liquidity due to the unprecedented surge in monetary and fiscal injections as a result of the pandemic. With the marketplace and current generation of investors having become conditioned to expect low rates after more than a decade of easy money, continued inflationary pressures and Fed hawkishness are likely to impose an uncomfortable adjustment in sentiment and valuations.<\/p>\n\n\n\n![\"Yields](\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/05\/Picture3-6.png\")
<\/figure>\n\n\n\nBusinesses Embrace Technology as Consumers Curtail Spending<\/strong><\/h2>\n\n\n\n
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