Dow Futures, US Dollar Brace for Impact

Dow Futures, US Dollar Brace for Impact as ISM Data Shapes Fed Views

By:Ilya Spivak

Rising Fed rate hike odds are keeping US stocks are under pressure and lifting the US Dollar. ISM manufacturing- and service-sector data is now in focus for clues about next steps.

  • Rising Fed rate hike bets hurt stocks and lifted the US Dollar in February
  • ISM manufacturing- and service-sector data in focus to guide next steps
  • Measures of employment within the ISM surveys may be most impactful

Fed rate hike rethink sends markets scrambling

Stock markets fell alongside gold while the US Dollar enjoyed a spirited recovery in February as the markets upgraded Fed rate hike expectations. The priced-in rates path now envisions the end of the rate hike cycle in September with a peak reading in the 525-550 basis-point range (5.25-5.50 percent). That’s up from a midyear stoppage point below 500 basis points seen as recently as a month ago.

That the Fed may push rates higher and hold them there longer has understandably spooked investors. Much of the story from November 2022 through January 2023 was about investors rushing to buy beaten-up assets hurt amid last year’s brisk rate increases, on the premise that the end of the US central bank’s inflation-fighting program was in sight. The February rethink came thanks to some telltale economic data – strong jobs growth and hotter-than-expected CPI inflation – along with combative rhetoric from Fed officials.

Data source: Bloomberg

All eyes on ISM data as Fed speculation continues to churn

The next chapter in this story comes by way of February’s economic activity surveys from the Institute of Supply Management (ISM). These indicators are centered around “50”. Readings above this level mark expanding activity in the economic sector being tracked – either manufacturing or services – while values below it indicate contraction. The greater the distance from 50 in either direction, the faster the process underway.

Expectations point to a slight improvement on the manufacturing side, with a rise from 47.7 to 48.0 marking a slowdown in the pace of retrenchment. Meanwhile, the pace of activity in the services sector is seen slowing a bit, with the index ticking down from 55.2 to 54.5. Surprising on the upside in either case may strengthen hawkish Fed speculation, hurting stocks and pushing the US Dollar upward. Alternatively, a notable miss might offer the bulls a lifeline.

How the employment component fares in either case may be of particular interest in shaping traders’ thinking. While manufacturing has struggled even as the service sector mounts a spirited recovery, the hiring picture has looked remarkably steady on both fronts. Resilience here is much of the reason why the Fed feels it must press on with tightening. Loosening the reins now risks locking in higher wages, turning inflation into a much longer-term concern. A pickup in hiring may thus prove unsettling, whereas signs of the long-awaited break in labor market strength may lift risk appetite.

Ilya Spivak is the Head of Global Macro at tastylive, where he hosts Macro Money every week, Monday-Thursday.

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