Next week, we will have the major employment data baked into the market. So it’s time to look to the future.
As the services sector was the most impacted by COVID, non-manufacturing PMIs have come to the forefront in terms of market impact.
And there is reason to believe that the results this time around could give some strength to the dollar. But for the wrong reasons.
The Broader Context
Last month’s PMI slipped a bit, though still remained healthily in growth territory.
That wasn’t out of line with the circumstances, since we were coming off the peak of the “second wave” of coronavirus cases. There was renewed talk of another round of shutdowns, as government stimulus had been held up by political wrangling.
But for this month some of those excuses aren’t valid; the second wave has come and gone.
The trend has shifted towards reopening, even if the largest states – California and Texas – continue to look at stricter measures. Businesses ought to have adapted a bit to the “new normal” of not expecting help from Washington in the near future.
On the other hand, there are a couple of new excuses.
Last month saw the last phase-out of government relief programs without an extension agreement.
And the political climate has become more acrimonious. In fact, the majority of business owners in the latest survey were worried most about potential property damage from riots.
The Economy Needs People to Buy
The evolution of expectations in the polls has even come to influence the outlook of retailers.
Candidate Joe Biden has pledged to ramp up anti-COVID measures, including further lockdowns.
By contrast, President Trump has pushed for reopening the economy. The relative potential of each winning in November could shape buying habits, especially larger investments.
The relative uncertainty could be an incentive for purchasing managers to hold off on some acquisitions pending the electoral results.
All in all, the market is likely to take a modest reduction in Services PMI optimism with little reaction. The latest result is still higher than the outlook among purchasing managers before COVID.
The other factor to keep in mind is the differential between open and not open businesses.
The businesses that have reopened tend to report significant optimism, while those who have not have a poor outlook.
However, the average figure often represents the relative proportions of open vs non-open businesses. A small number of businesses re-entering lockdowns might skew the results noticeably.
What We Are Looking For
Expectations are for ISM non-manufacturing PMI to come in at 56.0 compared to 56.9 in the prior reading.
Of note, we can expect the new orders component to fall substantially into contraction at 44.7 compared to 56.8 prior. Most of the loss in the projected headline figure is attributed to this, with other components actually expected to improve, such as employment.
We can likely explain this differential by managers keeping purchases on hold in the final month before the election.