The release of the ISM Services index brought unexpected news, sending USD pairs lower, with USD/JPY currency pair initially plunging nearly 40 pips to 151.64. The report diverged from the market’s anticipation of a strong economy and firming price pressures. The ISM Services index failing to meet expectations suggests a potential slowdown or weakness in the services sector, which plays a significant role in the overall economy.

Additionally, the decline in the prices paid component to its lowest level since March 2020 indicates a decrease in price pressures, contrary to previous concerns about inflationary pressures mounting. This unexpected data likely came as a surprise to market participants, leading to a reassessment of their outlook for the economy and monetary policy.

It suggests that the economic landscape may not be as robust as previously thought, and concerns about inflation may have been overstated. In response to the disappointing ISM Services data, market sentiment may have shifted, potentially leading to adjustments in expectations for future economic growth and monetary policy actions by the Federal Reserve.

The US Services Index from the Institute for Supply Management – March 2024

• ISM March services index 51.4 points vs 52.7 points expected
• ISM Februry services index was 52.6 points

Key details:

• Employment 48.5 points vs 48.0 prior
• New orders 54.4 points vs 56.1 last month
• Prices paid 53.4 points vs 58.6 last month — lowest since March 2020

Other components:

• Inventories 45.6 points vs 47.1 last month
• Supplier deliveries 45.4 points versus 48.9 last month
• Backlog of orders 44.8 points versus 50.3 last month
• New export orders 52.7 points versus 51.6 last month.
• Imports 52.4 points versus 54.3 last month
• Inventory sentiment 55.7 points versus 56.7 last month

The sudden drop in prices paid to their lowest level in four years has had a significant impact on market sentiment and expectations, particularly regarding inflation and monetary policy. The unexpected decline in prices paid likely caught many market participants off guard, especially as there were concerns and anticipation of another round of inflationary pressures. This sudden development may have alleviated some of the fears surrounding inflation, at least in the short term, with the Fed rate cut pricing now showing 69 basis points expected for this year, compared to the previous expectation of 66 basis points.

The market reaction to the data was notable, with the USD/JPY currency pair initially plunging nearly 40 pips to 151.64. Additionally, 10-year treasury rates experienced a reversal, erasing a 5-basis point gain. In terms of Federal Reserve (Fed) pricing, there has been a slight adjustment following the release of the data.  This suggests that market participants are slightly more inclined towards anticipating monetary policy easing by the Fed in response to the latest data.

Comments in the ISM Services Report:

• “The Red Sea turmoil is still not a notable challenge on supply for our sector, but we’re watching carefully for disruption risk. Also, the unrest in Haiti carries potential risk for the garment industry.” [Accommodation & Food Services]
• “Our market is shaping up to be the first normal year since the start of COVID-19. Volumes were down in 2022 and 2023. A price correction was made last year, setting up sales to move back to historical volumes.” [Agriculture, Forestry, Fishing & Hunting]
• “National business conditions remain strong in the industrial construction market. Labor is still tight across the country for skilled trades positions.” [Construction]
• “We are experiencing a budget shortfall, like many of our peers in higher education, so our spending will be down at the end of this fiscal year (June 30). Hiring is at a much slower pace as well, and we are still experiencing high employee turnover. Public opinion on the value of higher education compared to the cost is having an impact on our enrollment.” [Educational Services]
• “With the housing market continuing to stabilize, more mortgage inquiries are being made since my company opened up its mortgage loan program to loans other than Veterans Affairs loans.” [Finance & Insurance]
• “Continued inflationary pressure across multiple clinical device categories as contracts expire or are renewed.” [Health Care & Social Assistance]
• “Activity level holding steady for oil and gas.” [Mining]
• “Our company and industry continue to pull back to prepare for economic volatility in the second half of the year. Cost reduction initiatives remain a top-five company objective, even in a high-growth environment.” [Professional, Scientific & Technical Services]
• “Product supply chain is calm, and pricing steady. We are in slack time between seasons and use this time to prepare for spring/summer business. Challenges with employee retention in a few areas; however, turnover is only a few percent beyond target levels.” [Retail Trade]
• “Lead times and supply are improving, but several strategic items remain difficult to procure.” [Utilities]

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