ISM services index gains in September

The ISM services index in the US improved to 54.9 in September, a strong rise from 51.5 a month earlier and the strongest print of the index since February last year. There were strong gains across nearly all the subcomponents of the index with business activity in particular up strongly. Employment did worsen, however, falling to 48.1 from 50.2 a month earlier. The robust ISM report along with news that a dockworkers strike in the US has been suspended for several months will help to clear the way for the economy to perform well in Q4 and should allow the Fed to cut rates by 25bps at its upcoming meetings.

Initial jobless claims in the week ending September 28 increased to 225k, their highest level in the last four weeks though below some of the larger prints recorded in the summer months. Continuing claims for the week prior were marginally lower at 1.826m.

Turkey’s headline CPI inflation rate fell to 49.4% y/y in September, down from 52.0% the previous month. This was higher than the predicted 48.3%, while core inflation also exceeded expectations at 49.1%, compared with 48.0%. The miss will likely forestall any chance of a rate cut from the TCMB at the October 17 MPC meeting. Nevertheless, the headline September rate was lower than the current one-week repo rate of 50.0%, pushing real rates into positive territory for the first time since July 2021. With inflation moving in the right direction, a cut from the central bank in November remains possible.

Egypt’s economy grew by 4.7% q/q in Q2 according to national statistics. Transport and communication increased by almost 15% q/q while construction also increased by more than 6% and hotels and restaurants increased by a strong 74% in the quarter. However, Suez Canal activity dropped by almost 15% as shipments have been disrupted by militant attacks while manufacturing also dropped relatively sharply.

Further to our regional PMI report published yesterday afternoon, Lebanon also published its monthly survey for September later in the day with the BLOM PMI survey dipping to 47.0, down from 47.9 the previous month. The already embattled economy is facing fresh challenges relating to the conflict there and the outlook is increasingly difficult.

Final estimates for September composite PMIs in the Eurozone were stronger than the flash readings with the regional number at 49.6 up from the initial print of 48.9. The stronger estimate was down to France among major economies as the services sector there was revised up to 49. From 48.3 on the initial print.

Andrew Bailey, governor of the Bank of England said that the bank could become “more aggressive” and “more activist” on cutting rates as inflation moves to target rates of 2%. Markets had been expecting a relatively slower pace of rate cuts from the BoE compared with the Fed, helping to prop up sterling in recent weeks.

Today’s Economic Data and Events

• 16:30 US Change in on-farm payrolls Sept: forecast 150k
• 16:30 US unemployment rate Sept: forecast 4.2%

Fixed Income

• US Treasuries extended their losses overnight following the strong ISM services print. Yields on the 2yr UST added 6bps to 3.7053% while the 10yr yield rose by about the same amount to 3.8458%. Fed funds futures are still pricing in a midway point between 25bps and 50bps for the November Fed meeting with the release of non-farm payrolls later today to set the tone in the coming weeks.

FX

• Currency markets continued to seek out haven relief as geopolitical anxieties weigh on sentiment. The broad dollar index added 0.3% while EURUSD fell by 0.1% 1.1031 and GBPUSD dropped by a sharp 1.1% as Bank of England governor cautioned about the chance of steep cuts ahead. USDJPY rallied again by 0.3% to 146.93.
• Commodity currencies were weaker with USDCAD up by 0.4% to 1.3555, AUDUSD dropping by 0.7% to 0.6840 while NZDUSD ended lower by 0.8% at 0.6213.

Equities

• Equity markets remain downbeat on geopolitics with US indices lower overnight. The Dow Jones fell by 0.4% while the S&P 500 dropped by 0.2%. Markets in Europe were also weaker with a 0.9% fall in the EuroStoxx index while the FTSE was off by 0.1%.
• Local markets also remained under selling pressure with the DFM down by 0.9% and the ADX lower by 1.4%. The Tadawul dropped by 0.7%.

Commodities

• Oil prices continued to trend higher, up by 0.5% in the Brent market to USD 73.90/b and WTI at USD 70.1/b, up 0.4%. The spectre of geopolitics will continue to hang over oil, particularly is supply installations become a target in the ongoing regional conflict.
• Libya is due to resume oil production according to oil minister Khalifa Abdul Sadeq. Oil output had been disrupted following a dispute between political factions over leadership of Libya’s central bank, with output falling to less than 500k b/d by the end of August from around 1.1m b/d where it had been for most of the year.