ISM SERVICES KEY POINTS:
- March ISM non-manufacturing rises to 58.3 from 56.5 in February, mostly in line with expectations
- Growth in the services sector, where most Americans work, accelerates as the pandemic situation improves and spending reverts back to high-contact industries
- Strong economic data may help dispel recession concerns, strengthening the case for aggressive monetary tightening- a bullish outcome for the U.S. dollar
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A measure of U.S. business services activity accelerated in March, growing for the 22nd consecutive month and rising to its best level since January, a clear reflection of pent-up demand in the economy.
According to the Institute for Supply Management, its PMI non-manufacturing index registered a sharp upturn and climbed to 58.3 in March from 56.5 in February, mostly in line with consensus expectations. For general interpretation, any figure above 50 in the survey signals expansion while readings below that level indicate contraction.
The strong result suggests that the fading omicron drag is delivering significant benefits to high-contact industries and boosting spending in the services sector, which accounts for more than two-third of U.S. gross domestic product. Though COVID-19 infections cases have been inching higher again in recent days, hospitalizations are dropping rapidly and currently sit near their lowest mark since reporting began in July 2020, helped by broadening vaccine uptake. This is undoubtedly a good omen for the near-term outlook.
The ISM data also adds to optimism for the recovery in the post-pandemic world and dispels concerns that the U.S. economy is falling off the cliff on account of blistering inflation and rising geopolitical risks.
Looking at some of the survey components, the business activity/production gauge rose to 55.5 from 55.1, while new orders jumped to 60.1 from 56.1 in the previous period. Meanwhile, the employment indicator surged 5.5 points to 54 amid improving hiring conditions. For its part, the prices paid index edged up to 83.8 from 83.1, a sign that inflationary pressures are not relenting.
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The following table shows a more complete breakdown of the survey:
Source: Institute for Supply Management
MARKET ANALYSIS
The impressive ISM services numbers come after a week of broadly upbeat data, including the latest non-farm payroll report (NFP), which showed that U.S. employers added 431,000 workers in March, a figure that put the unemployment rate at 3.6% and the three-month average employment gain at 562,000 jobs, more than double the pace of hiring during the previous expansionary cycle.
Faced with four-decade high CPI, a very tight labor market and reassuring demand for servicesdue to the waning effects of the pandemic, there is no doubt that the Federal Reserve will continue to withdraw accommodation in the near future.
Last month, the FOMC kicked off its interest rate lift-off cycle by raising borrowing costs by 25 bps to 0.25%-0.50%, but at upcoming meetings, beginning in May, policymakers may deliver larger adjustments and start hiking in 50 bps increments to bring the policy stance to neutral more quickly in an effort to restore price stability.
While the central bank’s hawkish bias has sparked a yield curve inversion in the 2y/10y stretch and awakened recession concerns, resilient March economic data suggest that those worries are misplaced, at least for now. Against this backdrop, Treasury rates could remain on an upward trajectory, supporting the U.S. dollar and creating headwinds for non-yielding assets such as gold and silver.
Immediately following the release of the ISM data, the dollar edged higher as Treasury yields accelerated their advance, but moves are still limited as traders await the minutes of the latest FOMC meeting to be released on Wednesday. The document could provide insight into policymakers’ stance on front-loading interest rate hikes.
5 MINUTES US DOLLAR INDEX CHART
Source: TradingView
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—Written by Diego Colman, Contributor
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