The US dollar has been losing ground the last several days thanks to a combination of factors. There is a chance that the trend could continue after the avalanche of data this week.
Improving risk sentiment naturally weighs on the world’s reserve currency. Coupled with the Fed’s effective announcement that they would allow inflation to go higher than the target, it’s a recipe that’s likely to also push stocks higher.
When going over the ISM data this time around, focusing on the non-manufacturing component might give us better insight into how the market will evolve in the near term.
The current recession has been primarily due to the services sector having to close. This is something that the ISM non-manufacturing data measures more accurately.
This is especially true in the key month of August. During the month, businesses were breathing a sigh of relief after the second wave peaked late in July.
The Context is Important, Too
Purchasing managers are asked to weigh their current situation and where they think things will be in six months.
We could assume that they have a cool-headed calculation. However, it’s not unusual for the themes of the time to have an influence on the manager’s opinions. This might help explain why data might not exactly fit with expectations.
The ISM survey was conducted mostly last week. This was ahead of Fed Chairman Powell’s comments on prolonged low rates. (That said, the announcement of a flexible interest rate target had been speculated for quite some time).
At the time, there was another wave of riots, and the political conventions were in full swing. These factors might have contributed to a more austere outlook, leading to a higher chance that the data might miss estimates.
How Pessimistic Can You Be?
Another factor to keep in mind is that several government stimulus programs came to an end in July. This means less disposable income available for people to buy services.
Throughout the month, politicians weren’t able to agree on an extension of the assistance programs. This was despite (or perhaps because of) unilateral action by President Trump.
On the other hand, ISM manufacturing PMI handily beat all estimates. The New Orders component moved well into expansion, showing that buying appetite is returning.
What We Are Looking For
Projections are for headline ISM services PMI to slip slightly but remain comfortably in expansion at 57.0 compared to 58.1 prior.
Where we want to pay special attention is the ISM services employment index. Expectations are for this to slip to its worst performance since lockdowns at 31.9 compared to 42.1 prior.
New Orders are also relevant to give us some insight into how retailers expect sales to be in the future. Projections indicate that this will fall dramatically to 56.5 compared to 67.7 prior.