How the data creates a dollar selling opportunity ahead of the ISM Services PMI

  • Economists expect ADP’s private sector payrolls report to show a slight increase in September.
  • The dollar could use the low bar to rally.
  • ISM Services PMI expectations look upbeat after disappointing manufacturing report.
  • If services show a weak component of new orders, the greenback could start a fresh selloff

One meeting after the other – this is how the Federal Reserve has vowed to act in an uncertain world. For the markets, this means every data point is more important than usual, and the action gets wilder when two high-profile numbers are released in less than two hours. Here is my playbook for the two events.

First out is ADP’s September private sector jobs report. America’s largest payroll company resumed publishing its jobs reports last month after a summer hiatus to improve data quality, or at least correlation with the official Nonfarm Payrolls report. That still has to work.

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For the third straight month, ADP data fell short of economists’ expectations and also failed to predict the strength of America’s hot jobs market.

The numbers missed estimates in August, May and April:

Source: FX Street

The economic calendar shows an expected increase of 200,000 jobs in August, which seems modest compared to 315,000 jobs created in the previous month. Given ADP’s recent track record, any positive figure would be considered satisfactory as it also suggests an optimistic official figure.

After several sessions of dollar weakness, a strong – or even a less than terrible – report would be enough to trigger a recovery in the greenback.

Too optimistic ISM Services PMI?

The ADP NFP is released at 12:15 GMT and the ISM Services Purchasing Managers’ Index (PMI) is released at 14:00. Expectations are high: the headline is set to remain at 56, a healthy distance from the 50-point line that separates contraction from expansion. The most forward-looking component of this forward-looking survey is new orders. It is forecast to drop to 58.9 from the high level of 61.8 which is still a strong point.

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Even the Price Paid component is held at 69.8 points with increased estimates. With the Fed closely monitoring such inflation expectations and with no drop to or below 50, it will continue to hike rates.

A comparison with the ISM Manufacturing PMI gives food for thought as to whether these high estimates can still be exceeded when viewed individually. This report, released on Monday, showed that the inflation component slipped to 51.7. It’s hard to see how an 18-point gap between the two sectors can be maintained.

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The ISM Services PMI Paid Prices component was too high for too long:

Source: FX Street

I think the high expectations from this forward-looking poll for America’s largest sector opens the door to a disappointment that would see the dollar plummet — a repeat of Monday’s grind. This drop could be tougher from higher point if data from ADP provided some lift.

Final Thoughts

Market volatility is likely to remain high until the Fed gives a clear signal that it is slowing the pace of rate hikes. A lower-than-expected hike in Australia and the U-turn in the UK are insufficient – they’re just the latest twists in the roller coaster. Trade with care.

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