ISM Services Index

Uncomfortably strong US outlook. 

By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

Eurozone services PMI were disappointing in August, yet the ISM services index printed its strongest expansion across the Atlantic Ocean. The US ISM services index flirted with 55; employment, new orders, and ISM prices also showed significant progress last month. The strong ISM data bolstered the speculation that the Federal Reserve (Fed) could opt for another rate hike before the year end and keep the rates at restrictive levels for longer. The US 2-year yield advanced above 5%, the 10-year yield is around the 4.30% mark. Oh, and by the way, the US yield curve has been inverted since more than a year, but the resilience of the US economy continues surprising, and recession is nowhere around (at least in the data). 

The US dollar index extends gains toward the 105 level. At 105.40, traders will decide whether the dollar deserves to reverse its yearly bearish trend, and step into a medium-t

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Strong ADP Job Gains and Surging ISM Services Index Boost US Economic Outlook User

ING Economics ING Economics 07.07.2023 09:09
ADP shows 497,000 jobs created in June, biggest gains in over a year ISM Services Index makes 4-month high ISM Prices paid declined from 56.2 to 54.1, lowest since March 2020 US stocks extend losses after a hot ADP report and impressive ISM services report raised the odds the Fed might have to do deliver more rate hikes beyond the July FOMC meeting. The dollar pared losses as Fed rate hike odds rose on expectations the NFP report will deliver its 15th straight beat.   ADP The labor market is not loosening at all according to this ADP report.  The headline gain of 497,000 jobs was much higher than the forecast of 225,000 and well above the downwardly revised prior reading of 267,000 jobs.  Leisure and hospitality jobs surged 232,000 as summer job hiring supports the narrative that Americans will be vacationing a lot this summer.  The Fed’s rate hiking campaign is not yet crippling small and medium size businesses, but that should change going into the fall.  ADP Chief Economist Richardson noted, “Consumer-facing service industries had a strong June, aligning to push job creation higher than expected. But wage growth continues to ebb in these same industries, and hiring likely is cresting after a late-cycle surge”. The ADP report also includes coverage on wages, which showed year-over-year pay increase of 6.4%, which was down from 6.6% in May.    Jobless Claims Initial jobless claims for the week ending July 1st rose from 236,000 to 248,000, which was higher than the 245,000 consensus estimate.  Traders might not put a lot of weight with this weekly jobless claims report as it includes noise from the Juneteenth holiday and the summer auto closures.    Trade Data The May trade data showed the deficit narrowed from $74 billion to $69 billion as imports dropped 2.3% and exports weakened by 0.8%. The trade deficit won’t get a lot of attention but it does support the narrative that the economy is slowing down.    Fed Fed’s Logan noted that more rate hikes are necessary to combat inflation. Adding that a challenging and uncertain environment enabled a June pause. The data-dependent Fed will look at the labor market and that should support the case for much more tightening.   JOLTS The JOLTS report suggests the labor market is slowly weakening as job openings fell from 10.3 million to 9.824 million. The quits rate increased from 2.4% to 2.6%, which suggests people are confident they can get new work.   ISM Services Index The ISM Services report showed last month’s soft reading was not the beginning of a deteriorating trend. The ISM Services Index surged in June, rising to 53.9, significantly better than the prior reading of 50.3 and a 51.2 consensus estimate. Prices paid eased from 56.2 to 54.1. The employment component returned to expansionary territory at 53.1. This data suggest the economy still has a lot of strength. Treasury yields surged after the impressively strong ADP report and kept those gains post ISM services.     
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Bank of England Poised to Raise Rates to a 15-Year High Amid Economic Concerns

ING Economics ING Economics 03.08.2023 10:13
Bank of England set to raises rates to a new 15 year high European markets underwent another negative session yesterday, clobbered by concerns over weaker than expected economic activity, which in turn is raising concern for earnings growth heading into the second half of the year. Throw in a US credit rating downgrade from Fitch and the catalyst for further profit taking after recent record highs for the DAX completed the circle of negativity.     US markets also underwent a negative session, with the Nasdaq 100 undergoing its worst session since February, while the US dollar acted as a haven and the yield curve steepened. As a result of the continued sell-off in the US, and weakness in Asia markets, European markets look set to open lower later today, and while the Fitch downgrade doesn't tell us anything about the US political governance that we don't already know investors appear to be looking to test the extent of the downside in the market.     Earlier this week we saw some poor manufacturing PMI numbers which showed that the European economy was very much in recession, with disinflation very much front and centre. This has raised questions as to whether the services sector will eventually succumb to similar weakness. There has been some evidence of that in recent readings but by and large services activity has been reasonably robust. In Spain services activity is expected to remain steady at 53.4, along with Italy at 52.2. The recent flash numbers from France saw further weakness to 47.4, while in Germany we can expect to see a resilient 52, down from 54.1.         EU PPI for June is expected to slip further into deflation to -3.2% year on year. In the UK services activity is expected to slow to 51.5 from 53.7. With inflation unexpectedly slowing more than expected in June to 7.9% it could be argued that the pressure on the Bank of England to hike by another 50bps has eased somewhat, especially since the Fed and the ECB both hiked by 25bps last week.     Having seen core CPI slow by more than expected to 6.9% forward rate expectations have eased quite markedly in the past few weeks. Forward market expectations of where the terminal rate is likely to be, have slipped from 6.5%, to below 6%. It's also likely that inflation for July will slow even more markedly as the effects of the energy price cap get adjusted lower which might suggest there is an argument that we might be close to the end of the current rate hiking cycle.     The fly in the ointment for the Bank of England is the rather thorny issue of wage growth which has moved above core CPI, and could prompt the MPC to err towards the hawkish side of monetary policy and raise rates by 50bps, with a view to suggesting that this could signal a pause over the coming weeks as the central bank gets set to consider how quickly inflation falls back over the course of Q3. Such an aggressive move would be a mistake given that a lot of the pass-through effects of previous rate increases haven't fully filtered down with some suggesting that the Bank of England should pause. In the current environment this seems unlikely given a 25bps is priced in already.       In a nutshell we can expect to see a hawkish 25bps as a bare minimum, and we could also see a split with some pushing for 50bps. We could also get an insight into how new MPC member Megan Greene views the current situation when it comes to casting her vote. One thing seems certain, she is unlikely to be dovish as Tenreyro whom she replaced on the MPC.     We'll also get a further insight into the US labour market after another bumper ADP payrolls report yesterday which saw another 324k jobs added in July. Weekly jobless claims are expected to come in at 225k, while we'll also get an insight into the services sector with the ISM services index for July which is expected to come in at 53. The employment component will be of particular interest, coming in at 53.1 in June, having jumped from 49.2 in May.       EUR/USD – managed to hold above the 50-day SMA for the time being, with a break below targeting further losses towards 1.0830. Resistance currently at last week's high at 1.1150.     GBP/USD – also flirting with the 50-day SMA with a clean break targeting a move towards the 1.2600 area.  Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to edge higher drifting up to the 0.8630 level before slipping back, although it is now finding some support at the 0.8580 area. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to look well supported above the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 10 points lower at 7,551     DAX is expected to open 22 points lower at 15,998     CAC40 is expected to open 15 points lower at 7,297   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
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US Inflation Trends Suggest End of Rate Hikes and Potential for Rate Cuts Ahead

ING Economics ING Economics 11.08.2023 08:02
US inflation boosts case for no further rate hikes A second consecutive benign set of inflation prints adds to optimism that the Fed rate hike cycle is at an end and a soft landing is achievable for the US economy. We continue to have our concerns about the economic outlook, centred on the abrupt hard stop in credit growth, but the Fed will soon be in a position to be able to cut rates if a recession materialises.   US inflation pressures continue to ease The US consumer price inflation report showed that prices rose 0.2% month-on-month at both the headline and core (ex food and energy) level as was expected. To two decimal places it was even better at 0.17% and 0.16% respectively, which meant that the annual rate of headline inflation came in at 3.2% rather than 3.3% (versus 3% in June). Core inflation slowed to 4.7% from 4.8% as expected. A decent drop in used car prices helped (-1.3% MoM), but a second consecutive large decline in air fares (-8.1%) is a bit of a surprise. With medical care (-0.2%), recreation (0.1%), education (0%) and other goods and services (0.1%) all very subdued the Federal Reserve has got to be pretty happy with this. That so-called 'supercore' services (services ex energy ex housing) looks like it comes in at around 0.2% MoM, although the year-on-year rate ticks higher a little due to base effects.   Supercore services on the right path (YoY%)   Housing costs rose more than we thought though, with owners’ equivalent rent (the largest CPI component with a 25% weighting) rising 0.5% MoM/7.7% YoY but all in this report supports the nice golidlocks scenario of a slowdown in inflation allowing the Fed to stop hiking and eventually cut rates next year, which catches the slowing economy in time to prevent a recession. Obviously a lot can go wrong and we think it probably will given the worries about the abrupt slowdown in credit growth, but for now this data is encouraging   Housing components of CPI set to slow in line with rents   Headline may tick higher on energy but core will slow much further Unfortunately we are likely to see headline annual inflation rise further in YoY terms in August, albeit modestly. This will largely reflect higher energy costs, but we suspect it will resume its downward path again by October. Core inflation won't have this problem as the 0.6% MoM prints for August and September last year will drop out of the annual comparison to be replaced by 0.2% readings we predict, allowing annual core inflation to slow to below 4% by September. This is going to be increasingly driven by the all-important housing components, which are set to slow sharply based on observed rents while used car prices are set to fall further based on auction prices. Consequently we are increasingly confident of a sub 3.5% YoY core CPI print by year-end. We had been hoping that headline inflation could be around 2.5%, but the rise in oil and gasoline prices over the last couple of months makes this look less achievable.   Higher energy costs can be viewed like a tax – no need for the Fed to hike further In fact there has been some talk that the rise in energy costs will make the Fed more inclined to hike rates since it will push up inflation with rising costs potentially passed onto other components such as logistics and airline fares. We are not that concerned though since it can have a disinflationary effect elsewhere because higher energy prices can be viewed similarly to a tax. You can't avoid filling up your car with gasoline and you can't not heat your home etc so it effectively means you have less money at the end of the day to spend on other goods and services. It hurts economic activity and effectively intensifies disinflation in other components over time. As such the Fed will be watching and waiting to see what happens rather than any knee-jerk hike action.   NFIB survey points to weakening corporate pricing power and lower core CPI     Moreover, business surveys continue to point to weakening pricing power, such as the ISM services index being consistent with 1% headline CPI and the National Federation of Independent Business survey pointing to core inflation heading to 3% by year-end. Such an inflation backdrop should allow the Fed to respond to any recession threat with interest rate cuts next year.
US ISM Reports Indicate GDP Slowdown Despite Strong Construction; Manufacturing Continues to Contract

US ISM Reports Indicate GDP Slowdown Despite Strong Construction; Manufacturing Continues to Contract

ING Economics ING Economics 04.09.2023 10:40
US ISM reports remain consistent with GDP slowdown despite the construction boom Construction spending is performing strongly, but the ISM reports shows manufacturing has contracted for 10 consecutive months while next week's ISM services index is expected to post a headline reading consistent with the economy growing at a rate closer to 1% year-on-year rather than the 2.5% rate recorded in the second quarter.   ISM manufacturing index signals 10 months of contraction US ISM manufacturing index rose more than expected in August to stand at 47.6 versus 46.4 in July (consensus 47.0), but this is the tenth consecutive month it has come in below the break-even 50 level i.e. indicating contraction. The ISM surveys asks companies a range of questions on employment levels, orders, output, supplier delivery times and price pressures in order to come up with a broader picture of the state of the sector rather than measuring output alone such as in the industrial production report. The output index improved to 50 from 48.3, but new orders slipped back to 46.8. Prices paid moved higher to 48.4 from 42.6 but because this is below 50 it merely means that the rate of price declines are slowing rather than prices are moving higher. As such inflation pressures emanating from the manufacturing sector remain minimal and are consistent with goods consumer price inflation slowing closer to zero.     ISM reports suggest the economy is weaker than the GDP report has been signalling   Construction boom is a clear positive Meanwhile, construction spending rose 0.7% month-on-month versus the 0.5% consensus with June’s growth rate revised up to 0.6% from 0.5%. The housing market was a source of concern at the start of the year, but even with mortgage rates at 20-year highs and mortgage applications having halved, prices have stabilised and are now rising again nationally. Home supply has fallen just as sharply, with those homeowners locked in at 2.5-3.5% mortgage rates reluctant to sell and give up that cheap financing when moving to a different home and renting remains so expensive. This rise in property prices has boosted builder sentiment and lifted new home construction with residential construction rising 1.4% MoM in July after gains of 1.5% in June and 3.5% in May. Meanwhile, infrastructure projects under the umbrella of the Inflation Reduction Act are supporting non-residential construction activity, which posted the 14th consecutive monthly gain to stand 16.5% higher than 12 months ago.   Slower GDP growth ahead Construction is the stand out performer in the US right now, but next week's service sector ISM is predicted to slow to 52.4 from 52.7 and the combination of the two ISM series has historically been consistent with US GDP growth of 0-1% YoY, rather than the 2.5% the US posted in the second quarter (see chart). Just as the jobs report did earlier today, the ISM indices suggest little need for any further interest rate rises from the Federal Reserve.    
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The Indestructible Dollar: A Quiet Start to the Week in FX Markets

ING Economics ING Economics 04.09.2023 10:54
FX Daily: The indestructible dollar Today's US Labor Day holiday means that it has been a quiet start to the week in the world of FX. The dollar remains near its highs despite Friday's US NFP jobs report showing a jobs market moving better into balance and wages softening. That probably owes to poor growth prospects overseas. Second-tier US data releases look unlikely to hit the dollar too hard.   USD: Little reason to offload dollar positions The dollar has had a good couple of months. It has been buoyed by domestic strength in the US economy and souring sentiment in key trading partners such as Europe and China. The source of that strong domestic demand in the US has been a tight labour market, which has powered consumption. Despite US wage growth softening in August and the unemployment rate finally climbing, US Treasury yields actually rose on Friday and the dollar strengthened. Driving that move may have been the rise in the participation rate with people returning to the workforce. This suggests that the narrative may have moved on from the disinflation debate towards the extension of employment, consumption and domestic demand.  This week's US data calendar looks unlikely to open a decisive new chapter in this narrative – although in the past, the release of the ISM services index (remember that sub-50 reading at the start of the year?) has moved markets. That index is released on Wednesday. There are a few Federal Reserve speakers this week, but market expectations that Fed rates have peaked look set, as do views of a modest 100bp of Fed easing next year (we look for 200bp+). We see little to challenge a strong dollar this week and could see DXY edging up to the 104.50/70 area.  Elsewhere in the world, the central bank policy focus is on the likes of Australia, Canada, Poland, Chile, and Israel. No change is expected in most, although Poland should be starting its easing cycle this week, and Chile is expected to follow up its 100bp cut in July with another large rate cut.
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FX Markets React as Saudi Oil Cuts Boost Energy Prices

ING Economics ING Economics 06.09.2023 12:19
FX Daily: The Saudi squeeze brings energy back into the FX mix If the beleaguered euro and yen did not have enough to worry about already, they now have to cope with Brent oil trading above $90/bl as the Saudis extend their supply cuts through to year-end. Unless the US ISM services index somehow collapses today, expect the dollar to remain in demand. EUR/JPY, however, could start to turn lower based on positioning.   USD: ISM services the only threat to an otherwise bullish story The relentless rise of the dollar continues. The DXY yesterday pushed up to the highest levels since March as US yields once again edged higher. While the busiest day in US investment-grade corporate issuance in three years has surely been weighing on US treasuries, the FX market has also come under the spell of higher energy prices. The Saudis have this week confirmed their plan to roll over their 1mn barrels per day supply cut into December. This is keeping conditions tight in crude energy markets and now sees Brent trading over $90/bl. To FX markets, that provides an unwelcome reminder of the spike in energy prices last summer which had hit the energy-importing currencies in Europe and Asia. US energy independence and its net exporter status leave the dollar well-positioned for higher energy prices. It would seem the only real threat to the dollar in the near term would be some dramatic re-assessment of growth prospects. That brings us to the key piece of US data this week – today's release of the ISM services index for August. A sharp fall in this series did weigh on the dollar at the tail end of last year, but unless this really surprises with a sub-50 reading today, expect the dollar to hold onto recent gains and consolidate at these high levels before the US August CPI release this time next week. In terms of G3 currencies, we might see some re-adjustment, however. Speculators still seem to be holding onto long euro positions, while they continue to run very short positions against the yen on the carry trade. USD/JPY upside now looks more limited as rhetoric from Tokyo threatens imminent intervention. Positioning suggests EUR/USD support levels are more vulnerable. EUR/JPY may now struggle to get over the 158.50 area and may be about to embark on a correction to the 155 area.
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Uncomfortably Strong US Outlook Raises Speculation on Further Rate Hike

ING Economics ING Economics 08.09.2023 10:24
Uncomfortably strong US outlook.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Eurozone services PMI were disappointing in August, yet the ISM services index printed its strongest expansion across the Atlantic Ocean. The US ISM services index flirted with 55; employment, new orders, and ISM prices also showed significant progress last month. The strong ISM data bolstered the speculation that the Federal Reserve (Fed) could opt for another rate hike before the year end and keep the rates at restrictive levels for longer. The US 2-year yield advanced above 5%, the 10-year yield is around the 4.30% mark. Oh, and by the way, the US yield curve has been inverted since more than a year, but the resilience of the US economy continues surprising, and recession is nowhere around (at least in the data).  The US dollar index extends gains toward the 105 level. At 105.40, traders will decide whether the dollar deserves to reverse its yearly bearish trend, and step into a medium-term bullish configuration. Even though Fed's Waller sounded happy and satisfied with last week's weakish economic data – both for inflation and jobs – James Bullard said that the Fed should stick with a plan of one more hike this year. Maybe in November? For now, the market is positioned for no rate hike this year, but strong data and rising oil prices could change that expectation in the next few weeks. There is a growing chatter that the Fed could double its growth projection when it publishes an updated outlook later this month. I hope for the rest of the world that that does not happen!   

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