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US Dollar Falls as Weak Services PMI Data Boosts Case for Fed Pause

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ISM SERVICES KEY POINTS:

  • U.S. ISM Services PMI falls to 50.3 in May from 51.9 previously, well below expectations
  • The new orders index declines sharply, the employment indicator dives into contraction territory
  • The U.S. dollar, as measured by the DXY index, slides and erases session gains following disappointing U.S. economic data

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A gauge of U.S. business services activity ended its recent recovery and weakened sharply in May, a sign that the economic outlook is starting to deteriorate rapidly on the back of overly restrictive monetary policy and persistently high inflation.

According to the Institute for Supply Management (ISM), its services PMI index plunged to 50.3 from 51.9, well below expectations of 52.2, and one step away from entering recessionary territory. For general context, any value above the 50 threshold indicates growth in the sector, while readings below that level denote contraction.

Looking under the hood, the non-manufacturing sector was constrained by a sharp pullback in the forward-looking new orders component, which sank to 52.9 from 56.1 previously. The employment indicator also took a downward turn, retreating to 49.2 from 50.8, an indication that hiring conditions may be worsening.

Elsewhere in the survey, the prices paid index declined to 56.2 from 59.6, a welcome development for the Federal Reserve. Softening cost burdens for services providers, if sustained, could help ease inflationary pressures, paving the way for a less aggressive central bank stance.

US SERVICES ISM DATA AT A GLANCE

Source: DailyFX Economic Calendar

SERVICES PMI CHART (ISM)

image2.png

Source: TradingEconomics

Immediately after the survey results were released, the U.S. dollar, as measured by the DXY index, erased most of the session gains on tumbling Treasury yields, as weaker-than-expected services PMI numbers could give the Fed cover to hit the pause button and hold rates steady at its June meeting.

Month-to-month data can be noisy at times, so it is important not to draw too many conclusions from a single report. However, if other economic indicators confirm that the economy is downshifting sharply, it may be time to really worry about the possibility of an incoming recession.

US DOLLAR INDEX VS YIELD

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Source: TradingView

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