Introduction: A Surprising Signal
Financial markets were rattled today after the U.S. Institute for Supply Management (ISM) released unexpectedly strong April Services PMI data, pointing to persistent economic strength — and reigniting concerns that inflation may remain elevated longer than previously anticipated. This data lands at a precarious moment for investors who were beginning to price in multiple Federal Reserve rate cuts for the second half of 2025.
Instead of a smooth path toward easing, today’s figures underscore the risk that the Federal Reserve may be forced to hold rates higher for longer — a scenario that hammered tech stocks, lifted Treasury yields, and sent commodities and cryptocurrencies tumbling.
Market Snapshot: Red Across the Board
At the close of trading on May 6, 2025, all three major U.S. stock indices were significantly lower:
- S&P 500: ↓ 1.67% to 5,048.15
- Nasdaq Composite: ↓ 2.21% to 15,522.91
- Dow Jones Industrial Average: ↓ 1.23% to 38,134.07
Bond yields surged across the curve, led by the 2- and 10-year maturities:
- 2-Year Treasury Yield: ↑ 13 bps to 4.94%
- 10-Year Treasury Yield: ↑ 12 bps to 4.49%
Meanwhile, the U.S. Dollar Index (DXY) rose 0.54% to 104.93, exerting downward pressure on dollar-denominated commodities:
- Gold: ↓ 0.85% to $2,286.10/oz
- West Texas Intermediate (WTI) crude: ↓ 1.1% to $77.88/barrel
- Bitcoin (BTC): ↓ 2.9% to $59,240
This broad-based selloff reflected investors’ rapid adjustment to a new reality — one in which inflation remains sticky and the Fed is no longer expected to cut rates as soon or as aggressively.
ISM Services PMI: A Hotter-Than-Expected Report
The ISM Services Purchasing Managers’ Index came in at 54.8, significantly above the market consensus of 52.7. This marked the strongest pace of service sector expansion since August 2023, suggesting economic activity remains surprisingly robust.
More troubling than the headline number were the inflationary undercurrents revealed in the report:
- Prices Paid jumped to 61.9 (from 59.5 in March), signaling input cost inflation is accelerating.
- Employment Index returned to expansion territory at 51.5 (vs. 48.2 prior).
- New Orders surged to 58.3, indicating strong forward momentum in consumer and corporate demand.
Why It Matters
Services account for roughly 77% of U.S. GDP. Persistent strength in this sector implies that inflationary pressures are not merely residual or transitory but are embedded in core economic activity. For the Federal Reserve, this complicates the inflation outlook — particularly after March’s Core PCE reading (the Fed’s preferred gauge) came in at a stubborn 2.8% YoY.
Market Repricing: Rate Cuts Postponed
As recently as last week, markets had priced in a 45% chance of a rate cut at the Fed’s July policy meeting. That figure now stands at just 17%, with the first full cut not expected until September or later.
Fed Funds Futures Reaction:
| Meeting | Probability of Cut (Before) | Probability (After ISM) |
|---|---|---|
| July | 45% | 17% |
| September | 70% | 42% |
| December | 85% | 63% |
Fed policymakers had been cautiously optimistic that the disinflation process was progressing — but this optimism is now tempered.
Minneapolis Fed President Neel Kashkari, speaking at an event earlier in the day, warned:
“It’s critical we remain vigilant. We need sustained evidence of disinflation before easing monetary policy. This data doesn’t help.”
The Fed’s preferred playbook of “data dependency” means today’s ISM release could materially delay the long-anticipated pivot toward policy easing.
Tech Sector Tumbles: High Duration Pain
The technology-heavy Nasdaq Composite dropped more than 2.2%, suffering the steepest decline among the major indices. High-growth tech stocks are particularly sensitive to rising rates, as their valuations rely heavily on future cash flows.
Major Decliners:
- Nvidia (NVDA): ↓ 4.1%
- Apple (AAPL): ↓ 2.7%
- Tesla (TSLA): ↓ 3.3%
- Alphabet (GOOGL): ↓ 2.9%
- Amazon (AMZN): ↓ 2.5%
Despite strong Q1 earnings across the board, today’s move signals that macroeconomic factors — particularly interest rates — are reasserting dominance over micro-level fundamentals.
Bond Market: Yields Surge on Hawkish Repricing
Yields on U.S. Treasuries surged following the ISM data, with the 2-year yield approaching 5%, a level not seen since the inflation scare of late February.
This move reflects expectations that the Fed may maintain restrictive rates through the remainder of 2025.
Yield Curve Observations:
- 2s10s Spread: -45 bps (still inverted, but steepening)
- 5-Year TIPS Breakeven: ↑ to 2.62%, signaling rising inflation expectations
For investors, higher yields mean stiffer competition for equities, especially those with long-dated cash flow assumptions.
Dollar Dominates: Greenback Reclaims Strength
The U.S. dollar rose sharply against all major peers, with the DXY index up 0.54% on the day. The dollar’s rebound is notable as it coincides with a global slowdown in rate-cut optimism:
- EUR/USD: ↓ to 1.0682
- USD/JPY: ↑ to 154.17
- GBP/USD: ↓ to 1.2430
A stronger dollar exerts deflationary pressure globally, but it also tightens financial conditions — particularly for emerging markets reliant on dollar-denominated debt.
Commodities and Crypto Under Pressure
Gold
Gold prices fell back below $2,290/oz, giving up part of their geopolitical-risk premium accumulated in April. Rising real yields and a stronger dollar continue to weigh on the yellow metal, which now faces near-term resistance at $2,320.
Bitcoin
Bitcoin’s price declined nearly 3% to $59,240, reentering sub-$60K territory amid broad risk aversion. Regulatory uncertainty and tightening financial conditions have cooled the crypto rally that began in early March.
Oil
Crude oil prices dropped despite Middle East tensions, with WTI settling at $77.88/barrel, as traders grow concerned that stronger dollar and higher rates could sap global demand.
Global Markets: Ripple Effects Abroad
U.S. economic surprises have a global footprint. Today’s data contributed to a global equity selloff:
- Stoxx Europe 600: ↓ 0.8%
- FTSE 100: ↓ 1.0%
- Nikkei 225: ↓ 1.5%
- Hang Seng: ↓ 1.8%
The combination of tighter financial conditions, stronger dollar, and higher yields is a toxic brew for international equities — particularly in Asia and emerging markets.
Strategic Perspective: Navigating a More Hawkish Outlook
The takeaway from today’s market action is clear: hopes for a “soft landing” with rapid monetary easing are premature. Investors now face a reassessment of portfolio risk across multiple asset classes.
What To Watch Next:
- CPI Report (May 15): A critical barometer. If CPI remains elevated, September cuts could also be in jeopardy.
- FOMC Minutes (May 22): Will offer insight into the Fed’s internal divisions on inflation risks.
- Q1 Earnings Wrap-Up: Remaining sectors like industrials and discretionary will provide additional clues on consumer resilience.
Portfolio Implications:
- Shift toward value and defensives: Dividend-paying stocks and low-beta sectors may offer stability amid macro volatility.
- Watch bond duration: Yields are offering more attractive entry points, but remain vigilant of inflation surprises.
- Dollar hedges: Consider reallocating FX exposure if dollar strength persists.
Conclusion: Inflation Isn’t Dead Yet
Today’s ISM Services PMI has reintroduced a note of caution into financial markets, challenging the narrative that inflation is fully tamed and the Fed’s job is nearly done. As a result, equities sold off, yields climbed, and dollar strength reasserted itself — a sharp reversal from recent market optimism.
While one data point does not make a trend, it is a potent reminder that the inflation fight is far from over. Investors would be wise to prepare for an extended period of monetary caution and remain selective in both risk exposure and timing.
The road ahead looks bumpier than expected — and May has just begun.
