News & analysis

The ISM services PMI dropped to 51.4 in March, down 1.2 percentage points from 52.6 the month prior and disappointing market consensus that had been looking for a print of 52.8. Driving the decline in the overall measure was a slower pace of new orders, which fell 1.7pp to 54.5, faster supplier delivery times, and a continued contraction in employment.

However, while the data suggests that the US economy is slowing and thus inflation conditions are moderating, the ISM measure has been a particularly unreliable indicator of the US economy. This has been notably visible just in its measure of employment this year alone, with the sub-index suggesting little-to-no increase in service sector employment even as 357k jobs were added in the first two months of 2024. Moreover, the survey missed the acceleration in growth around the turn of the year, suggesting more reason to caution against the downturn in the headline measure.

Nevertheless, markets are taking the report at face value as it provides the first counterpoint to the Fed’s more cautious messaging, and starkly contrasts with the more inflationary manufacturing report released earlier in the week. However, we would caution against a similar stance and favour buying the dip in the dollar.

Not only have the ISM data been a poor measure of strength within the services sector, the anecdotal feedback supplied in today’s report also caution against over extrapolating the signal from the data. Take the commentary accompanying the employment sub-index for instance. Firms reported that employment challenges were restricting their ability to add workers, while some firms even stated that slow processing of year-end retirements and an inability to fill vacancies restricted headcount. This isn’t necessarily reflective of firms that are cutting jobs to protect revenues, a message similarly reflected by slow normalisation in the JOLTs job openings data. Similarly, while the report pointed to a sharp fall in the backlog of orders, which at face value would point towards easing demand and therefore softening inflation pressures, it also noted that 44% of respondents did not even measure order backlogs, casting doubt over how representative the index is of economic reality.

While we caution against overinterpreting today’s ISM services data, instead placing greater emphasis on Friday’s jobs report, the release has provided welcome relief for the dollar bears that have had to eat from the hot porridge bowl over recent weeks.

The dollar has sold off close to a third of a percent following the print, with losses largest against high beta FX. This is a result of the counterintuitive rally in US equities following the softer activity data, and not a decline in US rates as duration continues to sell-off today with yields on the 10-year breaking fresh year-to-date highs for the second consecutive day.

As noted, we favour buying the dip in the dollar on the back of weaker second tier data, especially against the likes of EUR and CAD where markets continue to trade ignorant to the deteriorating data.

Going their separate ways: the dollar sells off as back-end Treasury yields continue to climb


Simon Harvey, Head of FX Analysis

Nick Rees, FX Market Analyst


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