The S&P 500 has been basing for a few weeks and looks poised to break out now that the economy is reopening and should be fully open by June. Strong demand for travel and leisure is pushing up airline, restaurant, and entertainment equities. Bonds continue to underperform, and there are not many bright spots for fixed income at this time. 

The ISM Services PMI rose 1.3 points in May to 64.0, a fresh record high, and above the consensus of 62.4, as the reopening of the economy translated into faster services activity growth. The index is consistent with an above-trend economic expansion. We estimate that the combined latest readings of the ISM Manufacturing and Services PMIs correspond to 5.0% real GDP annualized growth, which is more than double the pre-recession pace in 2019. 

Both business activity and new order growth picked up last month, while export orders grew at the fastest pace since October 2018, as demand strengthened. But employment growth moderated as more firms reported difficulty finding skilled labor. Firms also continued to struggle with supply shortages, as deliveries slowed further and backlogs accumulated at a record rate. Inventories ticked up into positive territory, but inventory sentiment plunged to a new record low, as more managers thought their inventories were too low. This is a reflection of the current shortages, but also suggests potentially strong future demand as firms rebuild their stocks.

Similar to the manufacturing sector, the demand/supply imbalance in services has pushed up price growth. The ISM Services Prices Index shot up 3.8 points last month, its fourth consecutive gain, to 80.6, the second highest level on record. There were 45 commodities, the most since August 2008, that rose in price, and a record 27 commodities were in short supply. Notably, various labor categories (including skilled, temporary, and construction) were reported both as up in price and in short supply.

ADP private payrolls soared 978,000 in May, the most in nearly a year, and above the consensus of 700,000. The three-month average job gains posted 717,000, the best since last August, as the hiring trend accelerated along with the reopening of the economy. Following this improvement, ADP payrolls have recovered more than 60% of the 19.6 million jobs that were lost in the early months of the pandemic. But they are still 5.7% short of the pre-recession peak, indicating that the labor market recovery has a long way to go.