Markets came into the ISM report trying to turn softer payrolls into lower yields and easier financial conditions, and the June services data gave them enough to keep trying. The headline cooled to 54.0 from 54.5, while business activity and new orders slowed and employment moved back into expansion. That doesn’t look like a services economy breaking, so recession fear didn’t take control of the tape.

But the report improved without clearing the Fed problem, because prices moved in the right direction without moving far enough. ISM’s Services Prices index fell to 67.7 from 71.3, but prices still rose for the 109th consecutive month, with 16 industries reporting higher prices and none reporting lower prices. So markets got enough growth to keep risk appetite alive, while the price side stayed too firm for a clean rate relief trade.

That matters because the payroll report had already weakened the labor-resilience case. June payrolls rose only 57,000, unemployment was 4.2 percent, participation fell to 61.5 percent, wages rose 0.3 percent from May and 3.5 percent from a year earlier, and April plus May were revised down by a combined 74,000. Labor made it harder to argue the economy still needs more pressure, but services prices made it harder to argue the Fed can step aside.

Oil helped at the margin because crude is no longer forcing the inflation conversation. Brent and WTI are back near the levels seen before the Iran war, with Brent around $72.84 and WTI around $69.29 in early Tuesday trading, while the large Saudi price cut to Asia points in the same direction. But Reuters is still reporting a slow recovery in Hormuz tanker flows, missile reports near commercial shipping, UAE output above 3.8 million barrels per day, and another planned OPEC+ output increase, so oil has moved from the center of the inflation scare to a background risk markets still have to respect.

That mix showed up Monday, when the indexes looked relieved but breadth stayed weak. Markets had enough good news to keep buying the winners, but they did not have enough confirmation to widen the bid.

And the same narrowness sits under the AI earnings setup. Reuters noted expectations for roughly 24 percent year over year S&P 500 earnings growth in the second quarter, with tech earnings projected around 65 percent. That leaves the market dependent on a tight combination where AI spending holds up, margins hold up, rates do not push back, and inflation does not reaccelerate enough to keep the Fed on offense.

The uncomfortable overlap is that the AI buildout supporting earnings does not sit fully outside the inflation story. ISM flagged shortages in data-center inputs, including memory components, copper, aluminum, HVAC equipment, switchgear, transformers, and wire and cable, which is a reminder that AI capex creates demand for scarce physical inputs, power equipment, cooling systems, and financing before it shows up as clean productivity. Markets want AI to carry earnings while lower inflation carries multiples, but the buildout itself can still keep pressure on parts of the inflation problem.

So the next test moves from relief to confirmation. Today’s trade balance only matters if it changes GDP tracking or the dollar story, while the more important inputs are tomorrow’s FOMC minutes and the July 14 CPI report. That matters more after Waller argued that the balance of risks has tilted toward inflation, and Reuters noted investors still assigning roughly a one in four chance to a July hike.

My read is that services gave markets a partial pass, but not an “all clear.” Growth didn’t crack, oil is no longer screaming supply shock, and prices moved the right way. However, the price levels are still too high and the long end still has to cooperate. If CPI cools and yields let go, softer payrolls can keep doing work. But if CPI remains sticky or yields refuse to move, the story doesn’t end with labor weakening. It moves to prices.