US ISM services index falls sharply in June

The US ISM services index fell sharply in June, dropping back below the neutral line to 48.8, from 53.8 the previous month. This compares to a predicted 52.7 and was the weakest reading in four years. Prices paid continued to rise quickly at 56.3, but this was still a marked slowdown from 58.1 in May. Notably, employment contracted more sharply as the sub-component fell back to 46.1, from 47.1 previously, while new orders turned contractionary after expanding in May, suggesting more weakness to come.

The US ADP jobs report showed a net gain of 150,000 new jobs in June, down from 157,000 the previous month (revised up from 152,000 on the initial print). The June figure fell well short of the predicted 165,000. In other labour market data, the weekly initial jobless claims number for the week to June 29 came in at 238,000, up from 234,000 the previous week and marginally higher than the predicted 235,000. Continuing claims ticked up from 1.83mn to 1.86mn the highest number since November 2021 and the ninth week in a row that the number has risen, suggesting more people having trouble in finding new work. These data points follow on from a contraction in the employment subcomponent of the latest ISM manufacturing survey released earlier this week and taken together suggest a softening jobs market. Markets will be watching for the NFP report at the close of the week for confirmation of this, however.

The labour market appeared to be a major focus of the FOMC at the June meeting as the meeting minutes were released yesterday. Largely, the minutes appeared to strike a a fairly dovish tone, even though the dot plot projection of rate cuts this year was cut to just one at the meeting. Officials were still of the mind that inflation was slowing down but wanted ‘greater confidence’ in this before they implemented their first rate cut of this cycle.

Turkish CPI inflation fell to 71.6% in June, down from 75.5% in May. This was even lower than the predicted 72.6% and backs up the central bank’s prediction that price growth was set to peak last month. The TCMB forecasts that annual inflation will slow to 38% by year-end, although a hike to electricity prices announced last week will exert some upwards pressure. The core inflation index fell to 71.4%, from 75.0% previously while on the monthly measure, headline prices were up 1.6%, down from 3.4% in May. Services inflation was still very high at 95.3% y/y, but food and non-alcoholic beverages inflation fell to 68.1%.

Today’s Economic Data and Events

10:00 Germany factory orders, % m/m, May. Forecast: 0.5%

US markets are closed today for the July 4 public holiday

Fixed Income

• US treasuries gained for the second day running yesterday, with yields falling at both the short and the longer end after the surprisingly weak ISM services survey raised expectations around rate cuts.
• The 2yr yield fell 4bps to 4.7059%, while the 10 yr yield dropped 7bps to 4.3587%.

FX

• The heightened expectation for rate cuts following the ISM survey also weighed on the dollar, with the DXY index dropping 0.3% against its basket of peers yesterday.
• Most major currencies gained against the greenback, with EUR adding 0.4% to close at 1.0786, while GBP added 0.5% to 1.2742.
• JPY was an outlier as it continued to cede ground against the USD, falling 0.2% to 161.69. With the US closed for July 4 today there is speculation that the BoJ may choose today to intervene.

Equities

• In the US, the S&P 500 hit a new record high as risk-on sentiment took hold following the ISM survey. It climbed 0.5% while the NASDAQ added 0.9% to its own personal high, although the Dow Jones closed 0.1% lower.
• In Europe, the STOXX 600 closed up 0.7%, with the CAC and the DAX adding 1.2% each. In the UK, the FTSE 100 closed up 0.6%.
• Locally, the ADX gained 0.1% and the DFM closed 0.4% higher.

Commodities

• Oil prices saw sharp gains yesterday after the weekly EIA report on US inventories showed the biggest fall in crude stockpiles last week since July 2023. Crude inventories fell by 12.2mn bbl.
• This saw WTI prices close up 1.3% at USD 83.9/b, while Brent futures also closed 1.3% higher at USD 87.3/b.