Market Comment – ISM non-mfg PMI highlights superiority of US economy
September 7, 2023 8:29 am
US service sector unexpectedly gathers momentum
ECB officials keep a hike for next week on the table
BoE Gov. Bailey says they are ‘much nearer’ to rate peak
Wall Street slides as ISM PMI stokes inflation worries
Dollar receives boost from ISM non-mfg PMI
The US dollar ended Wednesday virtually unchanged against most of the other major currencies, gaining decent ground only against the pound and the franc.
The greenback got a strong boost after the ISM non-manufacturing PMI unexpectedly rose to its highest reading since February, confounding expectations of a small decline. With both the new orders and prices subindices edging notably higher, market participants added to their Fed hike bets, lifting the probability of a November increase closer to 60% just after the report, and scaling back some basis points worth of rate reductions for next year.
That said, with no clear reason, the dollar pulled back later in the day and the November hike probability retreated to 50%. Yet, heading into the upcoming FOMC gathering on September 20, the US currency may continue gaining ground against most of its major counterparts as traders seem to have started paying growing attention to economic growth dynamics.
Data out of the Eurozone and the UK have been pointing to sluggish economic performance, while US indicators have been highlighting the superiority of the US economy, with the dollar’s engines receiving extra fuel from concerns surrounding China. Trade data for August from the world’s second largest economy came in better than expected, but both exports and imports fell again, doing little to revive investors’ confidence, who seem to be waiting for Beijing to introduce further support measures to shore up the wounded economy.
ECB officials open to a September hike
Besides the ISM non-manufacturing PMI from the US, yesterday, euro/dollar traders also had to digest comments from several ECB policymakers, who generally agreed that raising borrowing costs next week remains among the options on the table. Some of them clearly favored raising rates now and perhaps taking a breather later, rather than pausing now and hiking later.
Yet, the market is assigning a 65% probability for no action at next week’s gathering, confirming the view that traders are now more concerned about economic performance than high inflation. However, they still see a similar chance for one last quarter-point hike by the end of December.
All this adds extra importance to next week’s gathering, as a rate increase could give the euro a shot in the arm. Even if policymakers don’t press the hike button now, appearing hawkish enough to convince the market that only one more quarter-point increase may not be adequate, the euro could still gain. Having said that though, should they appear more worried about the performance of the Euro area economy than sticky inflation and hint at approaching the end of this tightening crusade, the euro is likely to suffer another blow.
BoE’s Bailey said rates are near the peak; BoC stands pat
BoE Governor Andrew Bailey also stepped onto the rostrum yesterday, saying that they are “much nearer” to ending their own run of rate increases, although borrowing costs might still have further to rise due to stubborn inflation. With the market expecting two more quarter-point increases by the BoE, his comments were likely interpreted as dovish and that’s maybe why the pound was among yesterday’s main losers.
Elsewhere, the Bank of Canada kept interest rates untouched but noted that they remain concerned about the persistence of underlying inflationary pressures, and that’s why they remain prepared to raise rates further if needed. Still, investors are not expecting any action at the October gathering, assigning only a 40% probability for another 25bps hike by March next year.
Wall Street extends slide after better ISM PMI
Wall Street ended another day in the red on Wednesday, with the Nasdaq sliding the most. Perhaps this was due to investors lifting their implied Fed rate path after the better-than-expected ISM non-manufacturing PMI.
Given that the latest rally in Wall Street was mainly driven by high-growth tech firms and that those firms are usually valued by discounting expected free cash flows for the quarters and years ahead, their net present values (NPV) are now under some pressure. Having said that though, as long as most tech giants continue to anticipate growth in the years to come and as long as the market continues to anticipate a decent amount of rate reductions for next year, the current setback in equity markets may be classified as a correction within the broader uptrend.
Dollar receives boost from ISM non-mfg PMI
The US dollar ended Wednesday virtually unchanged against most of the other major currencies, gaining decent ground only against the pound and the franc.
The greenback got a strong boost after the ISM non-manufacturing PMI unexpectedly rose to its highest reading since February, confounding expectations of a small decline. With both the new orders and prices subindices edging notably higher, market participants added to their Fed hike bets, lifting the probability of a November increase closer to 60% just after the report, and scaling back some basis points worth of rate reductions for next year.
That said, with no clear reason, the dollar pulled back later in the day and the November hike probability retreated to 50%. Yet, heading into the upcoming FOMC gathering on September 20, the US currency may continue gaining ground against most of its major counterparts as traders seem to have started paying growing attention to economic growth dynamics.
Data out of the Eurozone and the UK have been pointing to sluggish economic performance, while US indicators have been highlighting the superiority of the US economy, with the dollar’s engines receiving extra fuel from concerns surrounding China. Trade data for August from the world’s second largest economy came in better than expected, but both exports and imports fell again, doing little to revive investors’ confidence, who seem to be waiting for Beijing to introduce further support measures to shore up the wounded economy.
ECB officials open to a September hike
Besides the ISM non-manufacturing PMI from the US, yesterday, euro/dollar traders also had to digest comments from several ECB policymakers, who generally agreed that raising borrowing costs next week remains among the options on the table. Some of them clearly favored raising rates now and perhaps taking a breather later, rather than pausing now and hiking later.
Yet, the market is assigning a 65% probability for no action at next week’s gathering, confirming the view that traders are now more concerned about economic performance than high inflation. However, they still see a similar chance for one last quarter-point hike by the end of December.
All this adds extra importance to next week’s gathering, as a rate increase could give the euro a shot in the arm. Even if policymakers don’t press the hike button now, appearing hawkish enough to convince the market that only one more quarter-point increase may not be adequate, the euro could still gain. Having said that though, should they appear more worried about the performance of the Euro area economy than sticky inflation and hint at approaching the end of this tightening crusade, the euro is likely to suffer another blow.
BoE’s Bailey said rates are near the peak; BoC stands pat
BoE Governor Andrew Bailey also stepped onto the rostrum yesterday, saying that they are “much nearer” to ending their own run of rate increases, although borrowing costs might still have further to rise due to stubborn inflation. With the market expecting two more quarter-point increases by the BoE, his comments were likely interpreted as dovish and that’s maybe why the pound was among yesterday’s main losers.
Elsewhere, the Bank of Canada kept interest rates untouched but noted that they remain concerned about the persistence of underlying inflationary pressures, and that’s why they remain prepared to raise rates further if needed. Still, investors are not expecting any action at the October gathering, assigning only a 40% probability for another 25bps hike by March next year.
Wall Street extends slide after better ISM PMI
Wall Street ended another day in the red on Wednesday, with the Nasdaq sliding the most. Perhaps this was due to investors lifting their implied Fed rate path after the better-than-expected ISM non-manufacturing PMI.
Given that the latest rally in Wall Street was mainly driven by high-growth tech firms and that those firms are usually valued by discounting expected free cash flows for the quarters and years ahead, their net present values (NPV) are now under some pressure. Having said that though, as long as most tech giants continue to anticipate growth in the years to come and as long as the market continues to anticipate a decent amount of rate reductions for next year, the current setback in equity markets may be classified as a correction within the broader uptrend.
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