The United States ISM Services Purchasing Managers’ Index (PMI) is set to be released on Tuesday and is anticipated to show a modest increase to 51.5 for July, up from June’s 50.8. This increase, though welcome, is a miss against analysts’ consensus expectations. A number over 50 indicates expansion in the services industry. This import sensitive sector is an essential linchpin to our country’s growing economic prosperity. The services sector is likely to stay in expansionary territory, with strong continuing demand even as some headwinds persist.
Amid all the uncertainty, investors are looking closely at the ISM Services PMI. This index has been indispensable in clarifying the economic realities in the U.S. The new report arrives during a period when inflation has persistently remained above the Federal Reserve’s 2.0% target rate. The ramifications of these numbers, both figuratively and literally, could shift market sentiment and steer upcoming shifts in monetary policy in the coming weeks.
Key Indicators and Economic Sentiment
The ISM Employment Index has fallen back into contraction territory, at 47.2. This monthly drop off continues to point toward some cooling in the prevailing employment growth in the large services sector, adding to worries about the labor market’s direction. On the other hand, the New Orders Index made a comeback, rising to 51.3 which indicates stronger demand for services. This positive movement in new orders indicates that businesses are still experiencing sufficient demand to warrant expansion efforts.
As for things getting rosier, the Prices Paid Index has fuelled that optimism as well, ticking downwards to 67.5 from last month’s 68.7. Although this drop can be seen as a pointer towards some easing of inflationary pressures, it remains an indication of persistently high costs that businesses are experiencing. Inflation is still a key issue since it can directly affect consumer purchasing power and thus the overall economy.
“The resurgence of the selling process could initially drag EUR/USD to its monthly floor at 1.1391 (August 1), which comes just ahead of the provisional 100-day SMA at 1.1369. The loss of the latter could put a potential move to the weekly trough at 1.1210 (May 29) back on the radar.” – Pablo Piovano
Market Reactions and Future Outlook
The U.S. Dollar has continued to hold onto its daily gains as investors digest the upcoming PMI report. Analysts are on guard against a potentially more severe drop from the resilient services sector that could rattle markets. If this change comes to pass, it will be time for investors to reconsider their bets on the Greenback. As one quick reminder, many investors still expect the Fed to make roughly two of those cuts this year. They think these changes will enable them to address high inflation and re-accelerate economic growth.
The atmosphere in financial markets is overall still very cautious but optimistic as all market participants look forward to the ISM Services PMI report today. Any uptick in this index may provide a needed shot of confidence in the emerging economic recovery. A deep enough downturn could provide pressure for a new look at these monetary policies.
“While above the 200-day SMA of 1.0944, the pair’s constructive outlook should remain unchanged.” – Pablo Piovano
Implications for Policy and Investors
The ISM Services PMI report out this Wednesday will carry particular importance for both policymakers and investors. No doubt it will have an impact on the debate over interest rates and overall economic policy in the years to come. With inflation being persistently high, any signs of economic weakness in the services sector may lead to a reassessment of the Fed’s approach to rate cuts and overall monetary policy.
With the report’s release date quickly approaching, market participants are preparing for a bevy of volatility depending on what data comes out. The services industry is the heart of U.S. economic growth. According to the Bureau of Economic Analysis, services accounted for 93 percent of GDP growth in 2018. As such, protecting its growth is important to the broader economic health.