Weak US data see dollar lose ground again
The gains for the dollar on Tuesday proved short lived, again, as the greenback failed to hold on amid some weaker US data. ISM services slipped into contractionary territory (just at 49.9) last month while ADP private employment gains were weak, up only 37k in May. The dollar lost about a 1/2 cent to the euro and is back trading above $1.14 while the US currency declined to over $1.3550 to sterling. The EURGBP cross remains trading in a tight range just above 84p. Looking ahead to today, the ECB meeting concludes at lunchtime with the market fully pricing in another 25bps cut in rates. All eyes then turn to President Lagarde’s press conference for indications for how long the ECB might go on hold before making another move.
The weaker US data saw the market increase the chances that the Fed may resume rate cuts as soon as September. A 25bps cut is almost fully priced in for the September meeting now, from about a 75% chance last week. That change in sentiment saw US bond yields fall with 10-year yields down 10bps to 4.35% and 2-year yields down 8bps to under 3.9%. The weak data did appear to hold back US equities, although there were gains in tech stocks, with the S&P flat for the day, but the Nasdaq was up 0.3% and the Eurostoxx outperforming both, up by 0.6%.
The ISM services index fell to 49.9 in May, down from 51.6 in April, when a small increase was expected. That means the ISMs are indicting both manufacturing and services sectors in the US are contracting. There was a steep drop in new orders (to 46.4 from 52.3) while the prices index surged, indicating price hikes already from higher US tariffs on imports. The ISM said that the reading was ‘not indicative of a severe contraction, but rather uncertainty’ adding that businesses report ‘difficulty’ in planning due to longer term tariff uncertainty and many were delaying or minimizing ordering until impacts were clearer. The employment measure did rise, but at 50.7 indicates a shallow amount of demand for new workers. All in all, the ISM surveys of both services and manufacturing indicate the US economy is slowing and there is no relief in sight from the volatility and uncertainty of the Trump administration’s tariff policy.
Re-enforcing this view was the ADP private employment change in May which showed just 37k new jobs were created in the US last month, the weakest in two years. The forecast was for an increase of over 100k , so this is downside surprise ahead of non-farm payrolls on Friday. The labour market in the US remains solid, with unemployment remaining low, but employment gains appear to be slowing and with more uncertainty ahead, further labour market cooling remains likely.
The latest edition of the Fed’s ‘Beige Book’ highlighted increased uncertainty and weaker activity around the US. The report said all districts reported ‘elevated levels of economic and policy uncertainty’. This, in turn, has led to ‘hesitancy’ and ‘caution’ among both households and businesses. Worryingly for the Fed, while prices increased at a ‘moderate’ pace, there was ‘widespread’ belief that costs and prices are going to rise at a faster rate going forward with a few regions believing the increases will be ‘strong, significant, or substantial’. All districts reported weaker labour demand and ‘widespread comments about uncertainty delaying hiring’. The outlook remains ‘slightly pessimistic and uncertain’ which is what one might expect given the volatility in economic policy in the US currently.
Irish Services PMI rose to 54.7 in May, up from 52.8 in April. This indicates solid expansion in the sector currently, and compares favourably to PMI services reading in the Euro Area (49.7) and UK (50.9), although it is below its long term trend level of 55.1. The increase last month was driven by improved new business growth and a recovery in output expectations. The employment index eased as businesses are more cautious about hiring and while firms remain optimistic about future expansion, sentiment remains relatively low with many citing ongoing trade policy uncertainty as a concern.
Looking to the day ahead, the main event will be the ECB meeting and President Lagarde’s press conference but also, closer to home, we get Irish Q1 GDP data.