Stocks May Fall as the U.S. Dollar Gains on Services ISM Data
Jul 5, 2023
Federal Reserve officials are laser-focused on the service sector, and with good reason. To get inflation back to the U.S. central bank’s target 2%, policymakers must figure out how to let the air out of the so-called “core services” component of the benchmark consumer price index (CPI).
The “goods” part of the equation has been worked down dramatically from where it was at the start of 2022 when the Fed began its rate-hike cycle. That is owed to the combination of the dampening effect of higher borrowing costs on trade flows and a complimentary healing of pandemic-damaged supply chains.
Food costs made up a sticky bit of the pie but a significant improvement (that is, a smaller CPI contribution) seems likely to show up in incoming months’ data. That’s because sugar prices have turned back lower after a trend-bucking rally that diverged from broader weakness in commodities. Export caps in India are being offset by oversupply in Brazil.
Energy prices are now a disinflationary force, despite supposed efforts to cut output by Saudi Arabia and Russia. Crude oil is down nearly 22% year on year at the start of July. Natural gas is down almost 62%. Tellingly, the Bloomberg Commodity Index – a catch-all measure of raw materials prices – is off by a far-more modest 8%.
This makes the service-sector Institute for Service Manufacturing (ISM) survey a key input for markets and Fed officials alike. The index is expected to inch up from 50.3 in May to 51.3 in June, implying a slight pickup in the pace of activity growth following a month at near standstill. Traders will be keen to see component gauges tracking prices and employment too.
Data from Citigroup suggests U.S. economic news-flow has increasingly outperformed relative to baseline forecasts since mid-May. This implies that market-watchers’ models are overly pessimistic and may set the stage for upbeat ISM results that spur on Fed rate hike speculation. That might bode ill for stocks and gold prices but benefit the U.S. dollar.
The manufacturing ISM survey released earlier this week offers something of a counterpoint. That survey undershot relative to economists’ projections, showing the sector shrank at the fastest pace since May 2020. That’s quite the reference point, implying conditions as dire as the first few panicked months of the COVID-19 outbreak.
Traders’ response to a similarly grim result on the services side may be telling. If it is celebrated as reducing scope for monetary tightening, stocks and other risk-sensitive assets may find room on the upside. If such thinking is overwhelmed by recession fears however, a market-wide retreat to cash may be inescapable.
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
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Image generated with Midjourney.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.