US Services PMI Preview: Down but not out

Service sector business sentiment expected to be stable in May
Activity and optimism has declined since the third quarter of last year
Sentiment is down but businesses are hiring

Joseph Trevisani FXStreet

The Institute for Supply Management (ISM) will issue its non-manufacturing Purchasing Managers' Index for May at 10:00 am EDT, 14:00 GMT Wednesday June 5th.

Forecast

The overall PMI is expected to be unchanged at 55.5 in May. The business activity index is predicted to drop to 58.5 from 59.5 in April. The new orders index was 58.1 in April and 59.0 in March. The employment index was 53.7 in April and 55.9 in March. The prices paid index was 55.7 in April and 58.7 in March.

The US economy and business sentiment

Economic growth in the US has declined from its 3.1% pace in the first quarter with the Atlanta Fed GDPNow track for Q2 at 1.3% on May 31^st.

Business sentiment in the service sector peaked at the end of the third quarter last year at 60.8. Business activity topped out a few months later in February. The new orders index reached a post-recession high at 65.2 also in February and employment touched 60.4 in September, 0.1 shy of the post-recession record.

Reuters

All of these service sector business indicators have fallen substantially through the first and into the second quarters, mirroring the descent of their manufacturing cohorts.

Several possibilities can be entertained as to why business sentiment would drop sharply with the United States expanding and little indication that the trade dispute with China has seriously disrupted the economy.

The expansive run that overtook business after the election of Donald Trump to the presidency in November 2016 was as much an emotional relief rally as an acknowledgement that business conditions would improve. Growth did accelerate and the economy reached 3% in 2018.

However pleased business may have been with the new attitude in Washington, part of the economic success last year was based on a government spending a boon that ended when the Democrats took over control of the House in the November 2018 elections.

The China trade dispute, now judged a war even if not a terribly active one, has not had a major impact on US growth. But the longer the confrontation runs the greater the drag on sentiment and the possibility that a breakdown will escalate into a full-fledged tariff based conflict.

Such a development would inhibit global economic growth and roil markets.

The pessimism that has surfaced in the ISM sentiment indexes is a measure of the concern that this might happen rather than proof that it has happened.

Even as the employment index saw its steepest fall in three years from 60.4 in September 2018 to 53.7 last month, business executives, presumably some of the same individuals, hired an average of 203,000 new employees each month.

Reuters

Sentiment is not an infallible predictor of economic activity, sometimes it is an elaborate set of worry beads.

Author

Joseph Trevisani

FXStreet

Joseph Trevisani began his thirty-year career in the financial markets at Credit Suisse in New York and Singapore where he worked for 12 years as an interbank currency trader and trading desk manager.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.