The ISM Services index rose 1.1 points to 56.0 in October, far better than the consensus forecast calling for a pullback to 53.8 and reaching the highest level since July 2022.

The employment sub-index shot higher by 4.9 points to 53, more than undoing recent months’ weaker readings. Meanwhile, both the new orders (-2.0 points to 57.4) and business activity (-2.7 points to 57.2) indexes were lower on the month, though each remain well above their respective prior twelve-month averages.

The prices paid sub-component edged lower (-1.3 points to 58.1), while supplier deliveries times were further elongated, reaching a 27-month high of 56.4.

Fourteen services industries reported growth in October — listed in order — are: Retail Trade; Information; Transportation & Warehousing; Accommodation & Food Services; Finance & Insurance; Construction; Mining; Public Administration; Utilities; Real Estate, Rental & Leasing; Educational Services; Professional, Scientific & Technical Services; Health Care & Social Assistance; and Wholesale Trade. The two industries reporting a contraction in the month of October are: Other Services; and Management of Companies & Support Services.

Key Implications

The ISM Services index defied expectations and rose to the highest level in over two-years in October. While both new-orders and business activity were a tad lower on the month, they both remain well in expansionary territory. Conversely, the sharp increase in the employment sub-index – reaching the highest level since February 2023 – provides further support that last week’s soft job numbers were likely heavily influenced by Hurricane’s Helene and Milton. Based on survey responses, recent weather events as well as last month’s short-lived port-strike also seem largely to blame for the further uptick in supplier delivery times.

Taking a step back, service spending has remained remarkably stable through most of this year, with the three-and-six-month annualized rates of change holding steady at 2.5% as of September. With measures of new-orders and business activity still at healthy levels, the backbone of consumer spending is likely to remain a sturdy contributor to growth in the fourth quarter and into next year.

Source: CNBC

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Energy – Middle distillate cracks continue to firm

Oil prices have held relatively steady as markets await the outcome of the US election, in what is expected to be a very close race. ICE Brent settled above $75/bbl yesterday with a weaker USD likely supporting the market. Oil will likely be vulnerable to broader moves in markets as we get more clarity on how the US election plays out. For oil fundamentals, a Trump victory could provide some short-term upside with the risk of stricter sanction enforcement against Iran. However, in the medium to longer term, a Trump victory could be more bearish for oil due to trade and foreign policy. Meanwhile, a Harris victory would likely keep the status quo.

In addition to a weaker USD, a decision by OPEC+ members to delay their gradual increase in supply by one month will also support prices, along with the potential for supply disruptions in the US Gulf of Mexico due to Tropical Storm Rafael.

In refined products, middle distillates continue to strengthen. The ICE gasoil crack is trading at its strongest level since early September. The strength seen in middle distillates has been driven by the jet fuel market, evident in the widening of the jet regrade, which is fairly common as we move into the Northern Hemisphere winter.

Metals – Complex rises on Chinese stimulus hopes

Copper rose for a third straight session with other industrial metals also edging higher yesterday as hopes for more stimulus measures from China supported the complex. Beijing is expected to unveil more support measures this week at the National People’s Congress’ Standing Committee meeting. In the latest comments, China’s Premier, Li Qiang, said that the government has the ability to drive sustained economic improvement and has ample space for fiscal and monetary policy. More fiscal stimulus measures are likely to revive investor sentiment and boost metals prices. Li Qiang also reaffirmed that China would reach its economic growth target of around 5% for the year.

The latest LME COTR report shows that investors decreased their net bullish position in zinc by 3,515 lots to 35,553 lots (the lowest since the week ending 4 October 2024). A similar move was seen in aluminium, with speculators decreasing their net bullish bets by 2,850 lots, after reporting gains for two consecutive weeks, to 124,473 lots over the last reporting week. In contrast, money managers increased net bullish bets in copper by 7,577 lots after reporting declines for three consecutive weeks to 74,752 lots as of last Friday.

Agriculture – ISMA maintains 2024/25 sugar output estimates

The first advance estimates from the Indian Sugar and Bio-energy Manufacturers Association (ISMA) show that gross sugar production in India remains unchanged from its preliminary projections of 33.3mt for 2024/25, compared to output of 34.1mt in 2023/24. The association added that sufficient availability of sugar will sustain the ethanol blending program, while also increasing the chances of exports. There are also suggestions that the government might consider increasing the minimum sale price of sugar in the coming days.

Recent data from the European Commission shows that EU soft-wheat exports for the 2024/25 season dropped to 7.8mt as of 3 November, down 32% compared to 11.3mt reported in a similar period a year ago. Weaker output has weighed on exports.

Source: MarketPulse

After much back-and-forth, a 25-bps cut is a done deal

The Federal Reserve is almost certain to deliver its second rate cut of this easing cycle on Thursday, with the size of the reduction no longer in question following a string of upbeat economic indicators out of the US. A 25-basis-point cut is more than 98% priced, as investors have shifted their expectations away from large 50-bps reductions to the possibility of a pause at one of the upcoming meetings.

The receding expectations of aggressive easing have spurred a more than 4% rally in the US dollar, as measured by its index against a basket of six major currencies. However, Fed rate cut bets have not been the only factor pushing up the dollar.

Trump energizes dollar bulls

Increasing odds of Donald Trump winning the presidential race on November 5 have also contributed to the greenback’s incredible bullish run during October as his policies are seen to be inflationary. The clash with the timing of the elections is why the Fed meeting is a day later than usual. However, even if the outcome of the election is known by the time FOMC members cast their own votes, it’s unlikely to influence the decision, at least not before the next president has taken office.

Hence, policymakers will be focusing on how the labour market and inflation picture have evolved since the last meeting. All indications are that the American economy remains in good shape with few signs of a severe downturn or even a slowdown. GDP grew by an annualized rate of 2.8% in Q3 and growth in the current quarter is running at 2.3% according to the Atlanta Fed’s latest GDPNow estimate.

Striking a balance

For the Fed, its primary concern has been the signs of cracks in the jobs market. July’s soft payrolls numbers that swayed the Fed towards cutting rates by 50 bps in September appeared to be a temporary weakness until the October report came along. However, the October readings were heavily affected by the impact of the hurricanes as well as the strike at aerospace giant, Boeing. More importantly, the unemployment rate held steady at 4.1%, having jumped to 4.3% in July.

Overall, though, jobs growth definitely appears to be slowing, and the Fed may need to move faster over the course of next year. But for now, policymakers have to strike a balance with still persistent price pressures. The Fed’s favourite inflation metric – the core PCE price index – was unchanged at 2.7% y/y in September, defying forecasts for a small drop. Other price gauges also support the case for caution; the ISM manufacturing prices paid index jumped from 48.3 to 54.8 in October.

Powell’s tone and election results will be crucial

All this suggests the Fed will stick to its latest messaging of gradual rate cuts going forward but Chair Jerome Powell will probably keep the door open to 50-bps moves. With no updated dot plot or economic projections at the November meeting, investors will be scrutinizing Powell’s every word in his press briefing, hoping to get some fresh hints from his views on the latest data and the state of the economy.

Unless there are any surprises, dovish or hawkish, the US dollar will possibly be driven more by the election headlines. If the early results out on Wednesday point to a Trump victory, both the dollar and Wall Street are likely to gain. But if Kamala Harris gets an early lead, the dollar would be susceptible to a selloff, while US equities will be choppy at the very least even if there is no clear reaction.

Is the dollar set for a roller-coaster ride?

For the dollar index, another wave upwards would likely face friction at the psychological 105.00 and 106.00 levels. But in the most bearish scenario, the October upleg could be entirely reversed, with supports probably seen at 103.00 and the 50-day moving average around 102.28.

However, if it appears that it could be days or weeks before a decisive winner can be declared, market volatility is sure to spike.