A Hot ISM Services Number Will Set the Dollar Up for More Gains


(Bloomberg) — The dollar is on pace to climb for an eighth straight week, the longest streak since 2005. Traders are looking to services sector data for the gains to continue, with the greenback tending to climb when the report shows expansion and outperforms a slowing goods sector.

Services have outperformed the goods sector by a 2.5-point margin over at least six months four times over the past 10 years, and in each of those times the dollar has gained an average of 4%. The currency’s advances have ranged from a modest 1% this year through Tuesday to almost 8% in the period ending November 2016 before peaking.

The divide is even more pronounced as services start to dominate after a pandemic-related slump and as goods activity and prices are pressured by slowing trade and monetary tightening by the Federal Reserve. 

“This resilience, whether looking at jobs growth, sticky inflation or consumer spending, is predominantly driven by services,” Adarsh Sinha, Bank of America’s co-head of Asia FX and Rates Strategy, said in a weekly outlook.  While the bank remains bullish ahead of the ISM Services Index report on Wednesday, “in our view, a meaningful slowdown in the service sector is necessary if not sufficient for sustained USD depreciation.” 

Friday’s August US payrolls report showed a labor market undergoing a controlled cooling. Yet, currency traders are keeping a close eye on the ISM index for more information on the health of the job market, with a weak number corralling dollar bulls. While an index of 50 or higher indicates expansion, the measure is seen easing from 52.7 to 52.5 for August.

Strategists at the bank say 80% of dollar appreciation since the beginning of 2022 can be attributed to either the Fed’s policy relative to the rest of the world or China.

Services Globally

How well the services sector is performing also has implications outside the US. Cracks are showing up in China, Europe, Australia and the UK, a trend that is shifting the outlook for policy and weighing on their respective currencies. 

Services generate more than two-thirds of global gross domestic product, attracting over three-quarters of foreign direct investment in advanced economies and employing the most workers, according to the OECD. 

The yuan sunk to its lowest level in almost two weeks Tuesday after a private survey of China’s services sector showed activity expanded at the slowest rate this year in August. In Europe, a flagging services sector prompted Morgan Stanley to change its policy outlook last week, saying the European Central Bank’s benchmark rate has likely peaked at 3.75%, from a prior view of more hikes.  

Morgan Stanley Changes ECB Call, No Longer Sees Any More Hikes

“The downside surprise in services inflation, combined with the upcoming base effects in September and weak services PMIs, provide good reasons to believe that services inflation will continue declining in the coming months,” Morgan Stanley economists including Jens Eisenschmidt wrote in a note. The euro has seen a number of bullish currency calls switched because of stagflation worries.

One outlier is Japan where PMI data show the services sector expanded for an 11th month in an economy that derives of about 70% of its gross domestic product from that segment. The next reading, along with wage developments, may come under particular scrutiny later this month after a soft employment report raised concerns about the Bank of Japan outlook.  

©2023 Bloomberg L.P.

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