The most important activity index fell as much as 12,5 points to 41,9 pts., well below the 50 pts. threshold, which separates growth and contraction. It may be well an outlier (December’s ISM manufacturing dropped to 47,7 pts., only to return above 50 mark in January), but it is scary anyway. For couple of reasons.  First, services are responsible for a bulk of the US economy and even small changes have a heavy contribution to a GDP change. Second, the index has been fairly stable, especially when compared to the ISM manufacturing. Third, the index has a decent forecasting power – it proved trustworthy signalling previous accelerations and slowdowns. Finally, a slowdown in services reflects a heavy drop in consumption, which is what Fed was afraid of the most.

Market’s reaction could not be different. Stocks indices fell by as much as 3-5% worldwide and yen gained, pushing USDJPY back below 106,50. EURUSD did not react and it deserves a word of comment. We have already signalled that the euro lost a momentum when it failed to score new highs in January (even though it was supported by fundamental factors and Fed’s cuts). Markets believe that while the recession in the US has been nearly discounted, a significant slowdown in Europe has not (at least on forex) and dollar’s depreciation against European currencies went too far.

Coming back to the ISM, it is important to mention that non-manufacturing headline has been released in January for the first time. It equalled 44,6 pts. and is now fully comparable to the ISM manufacturing.       

Przemysław Kwiecień