A broader-than-expected rise in US services activity in February signals sustained demand and labor market strength, potentially delaying Federal Reserve rate cuts. The expansion supports equities and pressures bond yields, with energy and financial sectors leading gains.
- ISM services index rose to 56.3 in February, indicating strong expansion
- Employment in services sector increased for the third consecutive month
- S&P 500 (SPX) gained 0.6% on resilient economic data
- 10-year Treasury yield climbed to 4.32% as rate cut expectations were revised down
- Crude oil (CL=F) rose 1.4% to $87.30/barrel on demand outlook
- VIX (^VIX) fell to 13.8, reflecting reduced market uncertainty
The US services sector expanded in February, with the ISM services index climbing to 56.3, well above the 50 threshold indicating growth and surpassing expectations. This marks the fourth consecutive month of expansion, driven by robust demand across travel, hospitality, and professional services. Employment in the sector rose for the third month in a row, with new orders growing at the fastest pace since late 2023. The data reinforces a resilient economy despite elevated inflationary pressures and persistent core services costs. A services PMI above 55 suggests businesses are confident in near-term demand, which supports continued hiring and wage growth. This dynamic reduces the likelihood of a Federal Reserve rate cut before summer, as policymakers assess whether inflationary momentum has cooled meaningfully. Financials and industrials led equity gains, with the S&P 500 (SPX) closing 0.6% higher, while the VIX (^VIX) edged down to 13.8, signaling reduced market volatility. Crude oil (CL=F) rose 1.4% to $87.30 a barrel, supported by stronger demand projections in the services-driven economy. Bond yields rose modestly, with the 10-year Treasury yield climbing to 4.32% as investors priced in a longer hold on monetary policy. The expansion underscores the durability of the US economy amid global headwinds. While not a surprise, the data strengthens the case for a more cautious Fed, potentially extending the current policy stance into late 2026. Markets are now pricing in only one rate cut by year-end, down from earlier expectations of two.