Strong ISM Services reading is a party killer Strong ISM Services reading is a party killer Strong ISM Services reading is a party killer

Strong ISM Services reading is a party killer

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  The rally in equities since mid-October has put the equity market in a bad risk-reward situation with equities pricing a rosy scenario with no recession and inflation coming back to normal levels with the Fed cutting rates in 2023. This milk and honey scenario will be severely tested in the coming months as the ISM Services Index for November showed yesterday. The services sector is still strong and inflationary pressures are still high with all roads still leading to high inflation.


Has the rally in S&P 500 ended for now?

In a recent string of equity notes (see bullets below) we have laid out our thinking about equities, earnings, operating margins, inflation and the economy as 2023 is approaching. These views have been in contrast to the equity rally that has unfolded since mid-October when the market began betting hard on “peak inflation” leading to a Fed pivot in 2023. However, yesterday’s ISM Services Index fir November came out at 56.5 vs est. 53.5 and up from 54.4 in October suggesting the US services sector remains impressively resilient. Prices paid in the survey remained high at 70 (the level since July) fitting well with the 7.5% annualised in the US services sector excluding energy as we described in our equity note following the US October inflation print back in mid-November.

S&P 500 futures traded 1.8% lower on the figures as interest rates got repriced and investors scaled back. The important question is not whether we have peak inflation rate, as that is most likely the case, but rather what is the floor in the inflation rate related to the structural dynamics in the economy. Years of low inflation and below needed investments in mining and energy will continue to haunt investors with higher inflation coupled with a war economy dynamic around global supply chains reshoring manufacturing to more expensive places than China. As we say in the Saxo Strats team all roads lead to inflation from now on and the market is now prepared for that. We maintain our defensive view on equities and maintain our S&P 500 target of 3,200 as the earnings recession that is likely to occur in 2023 has not been priced into equities.

Recent Saxo equity notes:

S&P 500 futures | Source: Saxo

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.