ISM for services disappoints while the dollar gains nonetheless

We are after the ISM reading for the service sector in the US. This turned out to be much worse than market expectations, which suggests cooling demand among American consumers. Noteworthy is the decline in the price index paid by companies to the lowest level in almost three years. You can see that high interest rates in the US are starting to affect the economy more and more.

Despite numbers worse than consensus, the dollar appreciated and the major currency pair is below 1,09 again. On Wall Street, declines prevailed, although the Dow Jones finished the day with a result of +0,2 percent.

Federal Reserve concern

Apart from Friday's release from the US labor market, investors expected yesterday's ISM result for the US non-manufacturing sector. It fell in March to 51,2 from 55,1 points. in February. Economists polled by Reuters had predicted that the index will drop to 54,5. Recall that services are the main sector driving the economic situation in the US. At the moment, it is inflation in this area that worries the Fed the most. It is generally more stable and less responsive to interest rate hikes.

The services sector continues to develop, as indicated by the score above the 50 point threshold. You can see that consumers have shifted their spending away from goods (which are generally bought on credit). As for the index of new orders received by companies - it decreased to 52,2 points. As demand cools down, inflation in the services sector is beginning to subsidealthough it remains at a high level. The measure of prices paid decreased to 59,5 from 65,6 in February. It is considered a good predictor of PCE inflation, which is the Fed's preferred picture of price growth dynamics. The decline in prices paid also reflects the continued improvement in supply.

NFP weaker than assumed?

The index of deliveries to the service industry decreased to 45,8 from 47,6 points. in February. A reading below 50 indicates a faster rate of these deliveries. Employment in this area of ​​the American economy also slowed down. The sub-index describing it decreased to 51,3 from 54,0 points. a month earlier. This suggests that tomorrow's NFP report may be weaker than expected. This is another signal of cooling down of the labor market, after the disappointing JOLTS survey, which we learned on Tuesday.

The futures market has slightly changed its valuation of the Fed's future moves. The implied path of interest rates still shows a change of 25 bps. from 47 percent probability in May and a reduction in the cost of money by the end of the year by a total of over 80 bps. The US 2-year yield fell 5 bps to 3,78%. and the 10-year to 3,31 percent.

Surprisingly, the US dollar gained during yesterday's session, and a stronger move was observed at 16:00 when the macro data described above saw the light of day. EUR / USD exchange rate it was below 1,09 again. Medium term the upward trend has not been negated and this correction may just be some kind of cooling down before the onslaught of the round 1,1 level. So far, the worse performance of the US economy has caused the market to start pricing in a turn in the Federal Reserve's policy more strongly. In this case, the reaction was different.

Source: Łukasz Zembik, OANDA TMS Brokers