Christopher Dembik

Head of Macro Analysis

Summary:  The disastrous ISM Non-Manufacturing increases the pressure on the Fed to cut rates this month. The strong consumer narrative is over.

It was the one of the most awaited US data this week. The ISM Non-Manufacturing is out, and it is a very negative signal for the US economy. The headline index is at 52.6 vs 55.0 expected. We finally have an answer to the question that many clients have asked over the past months. There is a contagion from weakness in the manufacturing sector to the service sector which represents roughly 70% of US GDP. Contrary to what has happened in 2016, the service sector is not immune to the downturn in the manufacturing sector.

Under the hood, the picture is even uglier than we can imagine. The key employment index is in free fall, from 56.2 in July to 50.4 in September, the lowest level since early 2014. I think it is safe to look for a big NFP miss tomorrow and for a sharp slowdown of USD GDP in Q3. Negative market sentiment is likely to increase further and, as usual, the market will turn to the Fed for further stimulus as soon as this month.

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