Reaction to US ISM Services Shows Markets Remain at the Middle of the Road

The markets used to be on one mindset from March until October, as the USD surged on the FED raising interest rates extremely fast. Then the situation reversed as the FED started giving less hawkish signals, which sent the USD lower and everything else up. But, since the middle of December, we have seen uncertainty and markets are running in either direction on every piece of economic data being released.

The uncertainty about what’s coming up next has been increasing, with many economists still undecided whether the global economy will fall into a deep recession, a mild one, or avoid it altogether. European manufacturing and services have been in contraction for several months, while US ISM manufacturing fell in contraption in November, Although services were holding up well, at more than 56 points in October, which is a decent level of expansion.

The ISM services sector survey is one of the best forward-looking indicators and Friday’s number plunged to 49.6 points in December from 56.5 previously, far worse than the economist consensus of 55.0. This means that US manufacturing is falling in contraction as well. What’s worse, the forward-looking new orders component in the survey looks like this:

There were some who were thinking that we could avoid recession in 2023, but now the duality stands whether the economy will have a soft recession or a hard one in 2023 and Friday’s numbers highlighted the challenge. The employment report on Friday was strong, as unemployment fell to 3.5% from 3.7%, but wages also softened as well, indicating that consumers might have difficulties later on and demand might fall.

Also, the employment report is a lagging indicator and the ISM services data looks forward so the plunge in new orders and services indicates that it’s only a matter of time before broader layoffs begin. Now the thinking is that the FED terminal rate won’t be above 5% and they won’t be able to hold rates at the peak for too long.  So, the USD crashed across the board once again.