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Weak services data raise big red flag on economy and pushes back Fed rate hike odds

An employee prepares a breakfast sandwich for a customer at a Dunkin Donuts Inc. restaurant in New York.
Victor J. Blue | Bloomberg | Getty Images

After a plunge in manufacturing activity, the much bigger services sector showed a surprise, massive slowdown in growth in August, raising new warnings on the economy.

The ISM non-manufacturing index fell to 51.4, the lowest level since February, 2010. The index reports on a much broader swath of the economy than the manufacturing report, and therefore is more concerning if it is signaling a new trend in weakness. The services sector represents about 70 percent of the U.S. economy.

Stocks lost ground and Treasury yields immediately fell, as investors jumped into the safety of bonds. Bond prices move inversely to yield. The 2-year yield, the one most sensitive to the Fed, tumbled to 0.74 percent from 0.79 percent.

Fed funds futures immediately reduced odds sharply of a September rate hike. They had been around 35 percent for September, but fell closer to 25 percent after ISM non-manufacturing report, according to Jefferies. July's ISM was 55.5 and economists had expected a reading of 55. Below 50 is a sing of contraction.

Last week, August's ISM manufacturing data came in at a stunning 49.4, the lowest since January. The two reports bookend Friday's disappointing employment report, where job growth fell to a slower pace of 150,000, 30,000 fewer than expected.

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