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ISM Non-manufacturing PMI – November Preview

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The Institute of Supply Management (ISM) will be releasing the monthly non-manufacturing or service sector PMI for November today. Considered to be one of the high impact items, investors will be keeping a close watch.

Economists forecast that non-manufacturing activity, as measured by ISM will fall to 54.5 in November. This marks a decline in the index from 54.7 in October.

U.S. Non-manufacturing PMI, October 2019
US Non-manufacturing PMI, October 2019

The services sector has been holding up steadily over the past few months amid a slowdown in the manufacturing sector. The services sector is one of the major contributors to the US GDP. Based on this, a slowdown in the non-manufacturing sector could spell trouble.

In October, the index rebounded after declining in the prior month. Services sector activity has been somewhat mixed over the past few months. The NMI is in a pattern of posting declines for two months before rebounding.

Comparing to the manufacturing sector, activity in the services sector is somewhat more stable. The ISM’s manufacturing PMI has been in a contraction. But the current data for both the manufacturing and non-manufacturing reports are consistent with the Fed’s view to pause further rate cuts.

Earlier, there were concerns about waning business investment. But it has become a bit more stable. Current forward-looking GDP trackers indicate an above 2% growth rate in the fourth quarter.

The latest revised GDP figures for the third quarter saw the US economy expanding at a pace of 2.1%. This was higher compared to the initial reports of a 1.9% increase, which was one of the slowest paces of increase in recent times.

ISM NMI – A rise is more likely for November

Following the rebound in October, the general consensus is for the non-manufacturing index to stabilize, if not expand on the gains from the previous month.

Given the fact that the months of November and December usually see higher spending, there are prospects for an increase.

The non-manufacturing index could there offer an upside surprise and could beat the current conservative estimates. The month of November did not see any big changes on the trade front which remain a concern.

Still, the progress during the month is largely positive. This could potentially translate to an increase in the new orders. In October, the new orders index rose to 55.6, up from 53.7 seen in September.

There was a widespread acknowledgment that the outlook was stable. But, businesses continue to remain cautious. Business activities, new orders, and employment sub-components were all seen to be rising at a faster pace.

But on the flip side, new export orders and prices paid came out lower comparing to the previous month.

Impact of the NMI report on the markets

From a trader’s perspective, today’s NMI report is relevant. The markets continue to remain divided on the future of rate cuts. The Federal Reserve signaled that it was done with rate cuts for now.

This means that when the central bank meets next week, the prospects of a rate cut are much lower. Amid this backdrop, a stable reading on the NMI index will be broadly welcomed by the monetary policy officials.

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