Last week featured a light economic calendar, with the Federal Reserve holding its benchmark interest rate steady for the third consecutive meeting as the main headline. Key data releases included the continued expansion of the U.S. services sector in April and a significant surge in the international trade deficit to a record high in March. Meanwhile, the S&P 500 snapped its nine-day winning streak but still managed mid-week gains, influenced by ongoing trade discussions.
ISM Services
The U.S. services sector continued to expand in April, marking its tenth consecutive month of growth. The ISM Services PMI unexpectedly rose from 50.8 in March to 51.6 in April. The index was expected to inch down to 50.2. Three of the four components that factor directly into the PMI were in expansion territory last month, with employment as the sole subindex in contraction. Additionally, three of the components increased from the previous month, with business activity as the sole subindex experiencing a decline. The services sector has now expanded in 55 of the last 58 months, dating back to June 2020. However, respondents continued to cite concerns around tariffs and federal agency budget cuts and how they will impact businesses moving forward.
Trade Deficit
The U.S. international trade deficit widened to a record high in March as imports rose more than exports. The trade deficit increased 14.0% to $140.5 billion, larger than the $136.8 billion deficit forecast. Imports rose by $17.8 billion (4.4%) to $419.0 billion while exports rose $0.5 billion (0.2%) to $278.5 billion. These are the highest levels on record for both imports and exports.
The country’s trade deficit has reached a record high and nearly doubled since October, marking the fourth increase in the last five months. This surge in the trade balance gap, which reflects the difference between imports and exports of goods and services and indicates overall economic growth or contraction, is largely attributed to consumers and businesses accelerating purchases (imports) ahead of potential tariffs following the election.
Market Reactions
The S&P 500 ended last week lower despite its mid-week gains, falling 0.5% from the previous Friday. As a result, the SPDR S&P 500 ETF Trust (SPY ) fell 0.4% last week. Meanwhile, the S&P Equal Weight Index was up 0.4% from the previous week and the Invesco S&P 500® Equal Weight ETF (RSP ) rose 0.4%.
The 10-year Treasury yield finished the week at 4.37%, while the 2-year note finished at 3.88%.
In their meeting last week, the Fed held rates steady at 4.25-4.50% for a third straight meeting. The CME FedWatch Tool currently shows an 83% likelihood that the Fed will hold rates steady at their next meeting in June. Markets are pricing in three 25 basis point cuts for later this year coming at the July, October, and December meetings. Additionally, one 25 basis point cut is projected in 2026.
Economic Data in the Week Ahead
The upcoming week’s economic data releases begin on Tuesday with the Bureau of Labor Statistics’ release of the Consumer Price Index (CPI) for April, which will provide a crucial update on inflation. Also scheduled for Tuesday is the latest reading on small business optimism. Thursday will bring a batch of data, including retail sales figures, offering insights into consumer spending, as well as the Producer Price Index (PPI) and industrial production numbers. Then on Friday, the University of Michigan will release its preliminary consumer sentiment report for May, which has recently plummeted to historic lows as inflation expectations have surged to near record highs. Against this backdrop of releases, inflation will undoubtedly remain a primary area of attention for consumers, businesses, investors, and policymakers.
Originally published on Advisor Perspectives
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