The Institute for Supply Management (ISM) is scheduled to release the October Services Purchasing Managers’ Index (PMI) on Wednesday. The report, which is a well-trusted measure of business performance and is widely seen as a leading indicator of economic activity, is expected to reflect a mild expansion in the services sector.
Because of the postponement and cancellation of key macroeconomic data releases due to the ongoing US government shutdown, the ISM Services PMI report could significantly influence the valuation of the US Dollar (USD) in the near term.
What to expect from the ISM Services PMI report?
Markets expect the publication to show a modest expansion in the services sector’s business activity, with the headline ISM Services PMI edging higher to 50.7 in October from 50 in September.
Previewing the report, TD Securities analysts said, “We look for the ISM surveys to move higher in October, following mostly disappointing outcomes in the summer.”. “ISM services should partially walk back its 2pt September drop. Respondent views and the ISM’s employment components will garner attention,” they added.
In September, the Employment Index came in at 47.2 and remained below 50 for the fourth consecutive month, reflecting a steady decline in the service sector’s payrolls. Following the October policy meeting, Federal Reserve (Fed) Chairman Jerome Powell acknowledged that the job creation was low but added that they did not see the weakness in the job market accelerating. Regarding the interest rate outlook, Powell said that another rate cut in December was “far from assured.”
Meanwhile, the inflation component of the PMI survey, the Prices Paid Index, remained above 69 for three consecutive months, reflecting strong input inflation for the sector.
According to the CME FedWatch Tool, markets are currently pricing in around a 67% probability of a 25-basis-point (bps) Fed rate cut in December.
Economic Indicator
ISM Services Employment Index
The ISM Non-Manufacturing PMI released by the Institute for Supply Management (ISM) shows business conditions in the US non-manufacturing sector, taking into account expectations for future production, new orders, inventories, employment and deliveries. It is a significant indicator of the overall economic condition in the US. The ISM Services Employment Index represents business sentiment regarding labor market conditions and is considered a strong Non-Farm Payrolls leading indicator. A result above 50 is positive (or bullish) for the USD.
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When will the ISM Services PMI report be released and how could it affect EUR/USD?
The ISM Services PMI report is scheduled for release at 15:00 GMT on Wednesday.
In case the headline PMI comes in above 50 as expected, and there is a noticeable recovery in the Employment Index toward or above 50, investors could turn reluctant to bet on a Fed rate cut in December. In this scenario, the USD could continue to gather strength, causing EUR/USD to push lower.
Conversely, a disappointing PMI print, combined with either a weak Employment Index figure or a significant decline in the inflation component, could revive expectations for further policy easing and weigh on the USD, allowing EUR/USD to stage a rebound.
Eren Sengezer, FXStreet European Session Lead Analyst, offers a brief technical outlook for EUR/USD: “EUR/USD’s near-term technical outlook points to a buildup in bearish momentum. The Relative Strength Index (RSI) indicator on the daily chart continues to decline toward 30, while the 20-day Simple Moving Average (SMA) extends its slide after completing a bearish cross with the 50-day and the 100-day SMA.”
“On the downside, 1.1400 (static level) aligns as an interim support level before 1.1320 (200-day SMA) and 1.1050 (Fibonacci 50% retracement of the January-September uptrend). Looking north, resistance levels could be spotted at 1.1600 (20-day SMA), 1.1670 (50-day SMA, 100-day SMA) and 1.1800 (static level, round level).”
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.