US Services Sector Growth Hits 8-Month High, Dampening Rate Cut Hopes
October's robust ISM PMI reading signals continued economic resilience and rising price pressures, complicating the Federal Reserve's policy path.
Growth in the U.S. services sector accelerated to its fastest pace in eight months in October, a sign of enduring economic momentum that challenges investor expectations for a near-term Federal Reserve interest rate cut.
The Institute for Supply Management (ISM) reported Tuesday that its non-manufacturing PMI registered 52.4, a significant jump from September’s 50.0 reading and well ahead of economists' consensus forecast of 50.8. A reading above 50 indicates expansion in the sector, which accounts for over two-thirds of U.S. economic activity.
The stronger-than-expected data triggered an immediate reaction in financial markets, as traders reassessed the likelihood of a monetary policy easing before the end of the year. The U.S. dollar strengthened against a basket of major currencies, while Treasury yields ticked higher. Equity markets edged lower as the prospect of higher-for-longer interest rates weighed on investor sentiment.
Diving into the report's components reveals broad-based strength. The Business Activity Index climbed to 54.3, while the New Orders Index—a key predictor of future activity—surged to 56.2, its highest level in a year. This suggests that businesses are not only managing current demand but are also seeing a robust pipeline of future work.
Perhaps most critically for the Federal Reserve, the Prices Paid Index, which tracks inflation for services businesses, jumped to a three-year high of 70.0. This resurgence in input costs indicates that inflationary pressures remain stubbornly elevated within the economy's largest sector.
"This report significantly weakens the argument for a December rate cut," noted one analyst at FXStreet. "The combination of accelerating growth and rising price pressures is the opposite of what the Fed would need to see to justify easing policy."
Prior to the release, money markets were pricing in a greater than 65% chance of a 25-basis-point rate reduction at the Federal Reserve's December meeting. Those odds fell sharply following the ISM data, reflecting a swift repricing of monetary policy expectations.
The report underscores the resilience of the U.S. consumer and the broader services economy despite the Fed's aggressive series of rate hikes over the past two years. Industries such as healthcare, hospitality, and professional services continue to show expansion, offsetting weakness in the manufacturing sector.
Investors will now turn their focus to upcoming inflation and labor market data for further clues on the Fed's next move. While the robust services activity is positive for corporate earnings, it keeps the central bank in a difficult position as it seeks to bring inflation back to its 2% target without derailing economic growth.