Inside Markets — ISM Services Print

Yesterday’s March ISM services print that included a sharp drop in the price component (53.4 from 58.6) provided relief to markets after Monday’s hot ISM manufacturing number. The 53.4 prices paid number is also the lowest in ~4 years and helps make January’s 64 print look like an outlier, which is similar to most of the January data. Importantly, yesterday’s ISM services ‘supplier delivery’ number, which is a proxy for supply chain efficiency, reached an all-time record low of 45.4 for the series that started in 1997. Supplier delivery is a measure of time, so lower means more efficient.

ISM services is the first sign of cooling inflation we’ve seen all year and it’s only a survey. Inflation will remain the key theme for Q2, which could translate into increased equity volatility with headline risk focused on rising crude prices. The inflation theme with the potential for increased volatility should keep Tech, cyclical groups and a large-cap bias at the top of the performance stack. Markets still expect a June Fed rate cut and there are 3 CPI prints before the June meeting. A ‘nothing done’ from the Fed wouldn’t necessarily derail the current rally, but a June rate cut with above trend growth could create a substantial tailwind.

Some of the recent rise in crude prices can be attributed to a series of successful Ukraine drone attacks on Russia’s energy infrastructure – specifically refineries. Ukraine has had military drones for a while, but credit for the recent increase in successful attacks is due to newly attained AI-empowered drones. The AI drones can operate without human pilots or satellite connection and have a longer range (up to 1300km). These drones have also proven more accurate than their predecessors with the ability to strike distillation towers that require Western technology to repair. The current range of 1300km means roughly half Russia’s refining is at risk with a planned improved range of 1500km capable of reaching more than 55% of total Russian capacity.