E The Daily Shot And Data - February 4, 2016

Greetings,

Let’s start in the United States where the ISM non-manufacturing report missed consensus. While the weakness in manufacturing can be dismissed as being a relatively small portion of the GDP, slower growth in services got everyone’s attention. Business activity, exports, and even the employment growth weakened.

Source: Investing.com

Source: ISM

A measure above 50 indicates growth, but this chart clearly says that the US service sector growth has slowed sharply.

It was interesting to see that the ADP employment report continues to show a solid pace of job creation.

Source: ADP

The ISM index on the other hand indicates a softer pace of hiring. The next ADP report may not be as benign.

By the way, the Gallup Job Creation Index also indicates a bit of loss of momentum.

Source: Gallup

And those who didn’t think that a strong dollar will not impact the US service sector, think again. Here is the service sector export orders index. That’s right, the US exports a great deal of services (consulting, engineering, financial services, etc.)

Moreover, the Services PMI report from Markit confirmed the bad news from ISM.

Source: Markit

Below is a comment from the Kansas City Fed’s Esther George who argues for continuing to raise rates this year.

Source: Kansas City Fed

Well, the US service sector reports above should provide that “substantial shift in the outlook”.

She also talked about not responding to each “market blip” in policy decisions. How about the fact that the treasury curve is now the flattest since the early 2008. Enough of a “blip” here?

The market response to the US service sector reports was swift. The Jan-17 Fed Funds futures and the Dec-16 LIBOR futures below show a rising probability of “one-and-done” (no rate hikes this year).