Strong rebound in US services sector makes rate cuts less likely

Meanwhile, job market is normalising with better balance between supply and demand

The US services sector snapped back into growth mode in May after a short-lived contraction in the prior month, with a measure of business activity improving by the most in three years, according to a survey published on June 5 that may buttress the US Federal Reserve's wariness of a shift to interest rate cuts.

At the same time, a gauge of hiring among private employers showed firms in May added the fewest jobs since January and small businesses shed jobs for the first time in six months, fresh signs that a tight labour market is easing back into balance.

Together, the reports from the Institute of Supply Management (ISM) and payrolls processor ADP paint a mixed picture of an economy that by and large continues to withstand the hefty rate increases imposed by the Fed, although evidence is building that growth may be ebbing.

While that may be the case overall economic output in the first quarter grew at the slowest rate in nearly two years and data so far in the current quarter on balance has been softer than expected - they are unlikely on their own to be sufficient to turn Fed officials any time soon from their central focus on containing stickier-than-anticipated inflation.

ISM said its non-manufacturing purchasing managers index rose to 53.8 in May from 49.4 in April. The reading in May, the highest since last August, topped the estimates of the 59 economists in a Reuters poll that had pegged the median expectation at 50.8, just above the 50 level that separates growth from contraction.

The report's business activity index shot up 10.3 points, the largest rise since March 2021, and vaulted it to 61.2, the highest level since November 2022.