The USD turned really weak since Monday last week, with the DXY index diving lower until yesterday. EUR/USD surged from 0.95 lows to exactly 1.0000.  But buyers failed to push the price above that level and sellers became active. The reversal started and after the US ISM non-manufacturing report the decline accelerated, with this pair falling to 0.9835.

The ISM services survey is one of the best forward-looking metrics of US economic strength and it was surprisingly strong in September at 56.7 points vs 56.0 expected. The takeaway is that the Fed won’t need to pivot just yet. The odds of just a 50 bps hike in November are down to 20% from 25% yesterday. The terminal top is now back up to 4.49% in March from 4.40% earlier this week.

US ISM Services for September

• September services PMI 56.7 points vs 56.0 expected
• August services PMI was 56.9 points

Details:

• Prices paid 68.7 points vs. 71.5 last month
• Employment 53.0 points vs. 50.2 last month — highest since March
• New orders 60.6 points vs. 61.8 last month
• Supplier deliveries 53.9 points vs. 54.5 last month
• Inventories 44.1 points vs. 46.2 last month
• Backlog of orders 52.5 points vs. 53.9 last month
• Exports 65.1 points vs. 61.9 last month
• Imports 51.3 points vs. 48.2 last month

This certainly doesn’t argue for a Fed pivot. If anything, it will strengthen the conviction of the hawks to keep rates high.

Comments in the report:

• “Sales at our restaurants seasonally trend down from August to October, and this year seems to be more severe compared to before the pandemic. General inflation concerns and consumer uncertainty are the likely causes, expressed by industry peers as well.” [Accommodation & Food Services]
• “General slowdown in sales. We believe high commodity prices and inflation have impacted consumers’ desire for fertilizer from our turf and ornamental division. Farmers have already cut back on consumption due to pricing and weather-related issues.” [Agriculture, Forestry, Fishing & Hunting]
• “September is one of our slowest months of the year. We are gearing up to have a very busy fourth quarter and are seeing some signs of relief in our supply chain.” [Arts, Entertainment & Recreation]
• “Sales have slowed significantly. Very challenging market. Trying to build through the backlog. Manufacturers, distributors and installation trades are still busy and passing on price increases, while we are discounting homes to stimulate sales. Margins are compressing.” [Construction]
• “Due to supply chain issues and inflation, we continue to limit purchases and/or start orders sooner than normal. In the higher education sector, the outlook is good for larger schools.” [Educational Services]
• “Labor pressures continue to depress business activity, as insufficient staffing levels are not allowing the hospital system to operate at capacity. Backorders remain unchanged from a month ago as shortages of raw materials — especially surgical grade Tyvek (synthetic polyethylene fiber), foam and plastics — persist and do not appear to be improving. Logistical lead times have decreased, but the impact on supply chains is limited amid product shortages.” [Health Care & Social Assistance]
• “Hiring continues to be a challenge across most industry sectors. There are far more open roles than candidates to fill them. Due to inflationary concerns, companies are being cautious about hiring direct employees and are attempting to utilize contingent labor. The lack of candidates willing to fill temporary positions is making this strategy difficult to execute.” [Professional, Scientific & Technical Services]
• “Chip shortage shows no signs of abating.” [Retail Trade]
• “Prices of fuel are leveling off (or) dropping in small increments. Still facing supply/demand issues with certain products — food, beverages, some raw construction material and semiconductor chips. Big concern is (China’s) zero-tolerance policy for COVID-19 cases. A lot of companies rely on products from China, and cities keep shutting down due to the policy. This greatly affects the orders outstanding and creates lead time uncertainty.” [Transportation & Warehousing]
• “Business activity has improved over last month but is still trending flat to slightly down versus the same period last year. Inventory levels are starting to fall from record highs, but overstocked items are still a problem. We expect lower demand and inventory rebalancing to impact business activity through the end of the calendar year.” [Wholesale Trade]