Markets reacted positively to a better-than-expected ISM Non-Manufacturing release at 10 am, but the gains were quickly erased once testimony from Fed Chairman Ben Bernanke was released shortly after.

The S&P peaked within minutes of the ISM index, but by 11 am the S&P had fallen 8 points to just below 900. The response may have been due to the Fed chairman’s caveat that growth wouldn’t occur this year if financial conditions didn’t keep improving. 

“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said in his testimony to Congress.

The Dow had similarly fallen 77 points to 8377 within an hour of the posting.

DeutscheBank’s chief economist, Joe LaVorgna, said Bernanke’s testimony did not diverge from the tone of last week’s FOMC statement. 

“The Chairman indicated that he expects the economy to bottom out and start to turn up later this year, although he sees inflation remaining low and likely moving down over the next year,” LaVorgna summarized.

Data Recap:

The ISM Non-Manufacturing Index improved to 43.7 in April, better than expectations for a 42.2 reading. Despite the improvement, April marks the seventh month that the survey’s reading has come in below 50, indicating contraction in the services, financial, and construction industries.

“Activity continues to decline, but the pace of decline is slowing rapidly, as the US economy heals itself, and continues to stabilize,” commented John Herrmann, from Herrmann Forecasting, who looks for a loss of 614,000 jobs in Friday’s Nonfarm Payrolls report.

At IHS Global Insight, Brian Bethune noted the April survey is the best reading in six months. He added that new orders, exports, and imports are all approaching the 50-level.

“In view of the massive fiscal and monetary stimulus that is being pumped into the economy, and clear signs of improvement in the financial markets and emerging export markets, reduced downward pressure on services activity is expected to continue,” Bethune said.

The ISM survey indicated that seven industries were expanding in April, in contrast to just one in March. 

Listed in order, the growth industries include Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Retail Trade; Finance & Insurance; Utilities; Other Services; and Accommodation & Food Services.