The monthly non-manufacturing PMI report from the Institute of Supply Management will be coming out today.
According to economists, median estimates point to a modest increase in the index.
Estimates show that the ISM non-manufacturing PMI will rise to 53.5 in October, after slipping to 52.6 in the month before.
U.S. Non-manufacturing PMI, September 2019
The non-manufacturing PMI report will be closely watched. The reason behind this is that the manufacturing PMI for October fell further into contraction. A weak print in the services or the non-manufacturing sector will spell trouble.
Note that the Federal Reserve, in its monetary policy meeting last week, cut rates. But the central bank removed a key reference from its statement. Investors view this as the central bank pausing its rate cut cycle.
For the moment, officials believe that the US economy will pick up the pace. It expects that the current low interest rates will help revive the economy.
But if the services PMI comes in weaker, then it would show some signs of trouble all around. The manufacturing PMI has been below the 50-level of the index for three straight months.
The data for October saw the index missing estimates, but was still slightly better compared to the month before at 48.3.
Both the manufacturing and non-manufacturing PMIs are leading indicators. Therefore, when these indexes slip below the 50-level, signaling contraction, it makes everyone take notice.
The recent jobs report also saw a mixed bag. The unemployment rate ticked higher due to an increase in the participation rate. But the pace of job growth is slower, including wages.
This will be the main question for market watchers. The ISM non-manufacturing PMI is fairly stable, comparing to the manufacturing sector.
In August, the non-manufacturing index rose to 56.4. This was the third-best reading on the index this year. But following the gains in August, the index is steadily slipping.
There are a number of factors behind the decline. The global economy is not at its best. Further to this, various global themes including the US-China trade war and Brexit have kept the uncertainty alive in the markets.
However, domestically, the US has managed to progress as far as the trade talks are concerned. This could mean that there is scope for the non-manufacturing PMI to rise. But given the overall slowdown in the economy, it would be hard to expect another solid print.
As long as the services index does not disappoint by a strong margin, the markets will see a somewhat muted reaction. But on the other hand, a strong disappointing print will raise prospects on the Fed’s decision.
There is already some speculation that the central bank could be making a policy mistake. However, from the Fed officials’ perspective, they need to see evidence of a slowdown in order to act more.
The central bank has lowered rates three times this year already. And based on the previous monetary policy statement, there won’t be any further rate cuts down the line.
This could change depending on the PMI numbers today. If the services PMI unexpectedly falls below the 50-level on the index, then the markets could go wild and that could set off a risk-on sentiment, further strengthening it.