There was quite a bit to digest with the US ISM services PMI print from yesterday here. For one, the headline was weaker than expected and it starts to bring up concerns that we’re in for a string of bad data releases from the US following the poor labour market report last Friday.
For US market sentiment and the dollar, this is striking at a rather unfortunate timing. Just when you thought the dollar is finally stabilising and the Fed might look to extend the pause in September, all of this is coming to shake things up now. And that has seen market pricing now pricing in a rate cut for September.
As for US data in general, we might be returning back to the sluggishness seen for the better part of the year. And that means more downside surprises rather than upside:
Going back to the ISM report yesterday, there are a couple of standout points.
The first one is the employment index, which fell from 47.2 in June to 46.4 in July. After the dismal jobs data at the end of last week, this will only add further concern to labour market conditions. And this is coming after the manufacturing report also showed a decline to 43.4 last week here, its softest reading since June 2020.
Typically, these components do well to track the potential impact on non-farm payrolls (h/t @ ING). However, the correlation hasn’t been as strong since the Covid pandemic. That being said, the directional bias is still very much intact.
What does this mean?
As the ISM employment components track lower, it just means that we should expect to see further softness in the labour market in 2H 2025.
Besides employment, yesterday’s report also saw the prices paid component rise from 67.5 in June to 69.9 in July. That’s the highest reading since October 2022.
Tariff concerns will take the blame here and that might complicate things for the Fed. The question now though is how much will policymakers want to look through this and associate it as being just a temporary thing.
As things stand, inflation concerns arising from tariffs are expected to be more of a passthrough rather than it being permanent. If so, that shouldn’t stop the Fed from cutting rates. However, it is worth to keep tabs on this to see how things develop in the months ahead especially.
This article was written by Justin Low at investinglive.com.