INSTANT VIEW: Service sector expands in May, prices up big

NEW YORK (Reuters) - The U.S. service sector grew in May for a second straight month, according to a report released on Wednesday that showed a worrying jump in inflation pressures.

KEY POINTS: * The Institute for Supply Management's non-manufacturing index came in at 51.7 in May versus 52.0 in April. * The dividing line between growth and contraction is 50. * Economists had expected a reading of 51.0 for May, according to the median of their forecasts in a Reuters poll. * The 76 forecasts ranged from 48.5 to 53.0. * The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants. * The prices paid index shot to 77, the highest since September 2005 and the second-highest reading in the history of the data series.

COMMENTS:

ERIC KUBY, CHIEF INVESTMENT OFFICER, NORTHSTAR INVESTMENT

MANAGEMENT CORP, CHICAGO:

"I don't think we can completely forget about yesterday. While there was some positive news today between American Express and the ADP report, I think people may be a little bit concerned about getting whipsawed.

"You've got people focused on Lehman, what their balance sheet looks like. The ISM non-manufacturing number is a little bit of surprisingly good news. I think it confirms that the employment picture continues to provide some comfort in an economic environment that otherwise is looking very dicey."

MICHAEL POND, TREASURY AND INFLATION-LINKED STRATEGIST,

BARCLAYS CAPITAL, NEW YORK:

"We have been getting stronger than expected data over the past couple of weeks, both from the manufacturing side and now from the services side. Data overall has been quite inconsistent with calls back in March that the U.S. was entering a prolonged recession. Its still not growing gangbusters but today the (bond) market is a bit more focused on what is going on with equities and in particular with the financials.

Inflation is clearly a concern here, and investors are coming into the TIPS market to get inflation protection."

BETH MALLOY, BOND MARKET ANALYST WITH BRIEFING.COM,

CHICAGO:

"Treasuries were off right off the bat on that number, which was a little better than expected. Also the prices paid component was up pretty good and that is not a positive for bonds."

"But at this point, with payrolls sitting at the end of the week, the market is not going to put too much stock in anything."

GARY THAYER, SENIOR ECONOMIST, WACHOVIA SECURITIES, ST.