The US S&P Global Services PMI for March showed a sharp slowing in services activity. It moved into contraction for the first time since January 2023, linked to higher inflation and the war in the Middle East.
The index fell to 49.8 in March from 51.7 in February, according to S&P. S&P reported this was the lowest reading in over three years and consistent with a fractional drop in activity.
Services Activity Slips Into Contraction
The report pointed to rising input prices, including higher energy costs, as a factor weighing on the sector. It said input cost inflation remained above trend, with overall prices rising at the fastest pace so far in 2026.
S&P data also indicated the broader economy was near stalling, at a 0.5% annualised growth rate in March. Consumer-facing services were described as the worst affected, with one of the steepest downturns since the series began in 2009, excluding pandemic lockdowns.
After the Nonfarm Payrolls report, the US Dollar stayed steady following a modest rise. The US Dollar Index (DXY) was slightly higher, trading above 100.00.
With the US services sector now in contraction for the first time since January 2023, we must prepare for broader economic weakness. This sharp slowdown, evidenced by the PMI dropping to 49.8, suggests corporate earnings forecasts for the coming quarters are likely too optimistic. Defensive strategies should be considered as this is the weakest reading in over three years.
Market Positioning For Higher Volatility
This environment of slowing growth combined with rising inflation points to increased market volatility. We saw a similar pattern in 2022, when stagflation fears kept the VIX index elevated for months. Therefore, purchasing protective puts on major indices like the S&P 500 or establishing long positions in volatility derivatives seems warranted.
The Federal Reserve is now in a very difficult position, caught between fighting inflation and preventing a recession. The latest CPI data showed inflation remains sticky at 3.8%, making it hard for the Fed to justify cutting rates despite the clear economic slowdown. We should monitor interest rate futures closely, as any shift in the Fed’s tone will cause significant repricing.
The report specifically cites surging energy costs as a primary driver of inflation and a drag on consumer spending. This suggests a potential pairs trade of shorting consumer discretionary sector ETFs while going long on energy derivatives. Looking back at 2025, we recall how energy stocks provided a strong hedge during periods of market stress driven by inflation.
The US Dollar Index remains firm above 100.00, likely benefiting from safe-haven flows amid global uncertainty. However, this strength may be temporary if the economic data continues to worsen and forces the Federal Reserve to signal an easing cycle. We should be cautious about being overly long the dollar, as a pivot in Fed policy could trigger a sharp reversal.
