Markets at Risk if ISM Data Cools Fed Rate Cut Speculation
By:Ilya Spivak
Stock markets are still in limbo after last week’s seesaw price action.
Services ISM data may feed Fed rate cut speculation, offering a lead.
Firm outcome might weigh on equities while boosting the U.S. dollar.
Financial markets are still struggling to make sense of last week’s seesaw price action, with stocks seemingly no closer to a resolution.
Another wave of risk-off selling attempted to build overnight in European hours but buyers stepped in to scoop the bellwether S&P 500 and the tech-tilted Nasdaq off session lows in Wall Street trade. A rally has likewise failed to materialize in earnest, leaving the two top equity indexes little-changed as the close approaches.
A dose of speculative fuel feeding interest rate expectations—the lingering macro focus for the markets—may come by way of May’s service sector activity survey from the Institute of Supply Management (ISM). It is expected to show a return to expansion mode after a shock contraction in April.
The headline index is seen rising to 50.5 from 49.4, crossing back above the 50 “boom-bust” threshold. However, it’ll be the report’s inflation gauge that is likely to take top billing. It has tended to lead CPI and PCE inflation readings by about two months.
That sub-index shot up to a three-month high in April despite slowing orders and shrinking employment. May’s manufacturing sector ISM report published earlier in the week told a similar story. A drop in new orders drove down the headline figure, but employment surged and price growth held near two-year highs. All this portends inflation.
Meanwhile, analytics from Citigroup reveal U.S. economic data outcomes have turned higher relative to baseline forecasts over the past two weeks. Blistering strength in May’s purchasing managers index (PMI) data from S&P Global—an analog of the ISM report—is a case in point. It pointed to sticky price pressures across nonfarm sectors.
All this may set the stage for service sector ISM data that dilutes Federal Reserve interest rate cut speculation. The central bank has said it lacks enough confidence in ongoing disinflation to begin an easing cycle even as it prefers not to resume hikes. This “higher for longer” stance has shifted speculative interest to the 2025 policy path.
As it stands, the markets are pricing in 65 basis points (bps) in cuts next year. That amounts to two standard-sized 25bps reductions and a 60% probability of a third. If the ISM report argues for a pivot toward a less dovish setting, stock markets may wobble while the U.S. dollar pushes higher against its major currency counterparts.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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