Friday Radar on ISM Services Data

STOCK INDEX FUTURES

The indexes are little changed in the absence of Friday’s labor report, which has left markets to lean on private surveys which have shown a subdued labor market. Wall Street remains focused on AI trade, especially amid renewed buzz over OpenAI. OpenAI’s valuation soared to $500 billion, making the company the most valuable startup in the world. No near-term solution for the government shutdown appears in sight. Democrats continue to push for the continuation of healthcare subsidies as a condition of funding the government, while Republicans refuse to negotiate on the issue until the government is back up and running. President Trump also threatened to cut thousands of federal jobs to pressure Democrats into a deal.

ISM Services PMI data out later in the morning will be the highlight of the day on the data front. The survey will serve as a decent replacement for payrolls given that the US economy is over 80% service dominated. For the week, the S&P 500 is up nearly 1.1%, the Dow Jones 0.6%, and the Nasdaq 1.6%.

CURRENCY FUTURES

US DOLLAR: The USD index slipped in overnight trade as the greenback heads for its worst weekly performance since late July. While markets view the government shutdown as having no real impact, the lack of data, especially what would be September’s jobs report today, has added to broader concerns over policy uncertainty. Markets yesterday looked to Challenger job cuts data and the Chicago Fed’s estimate of the unemployment rate, both of which reflected a jobs market that is subdued but not falling apart. Dallas Fed President Logan (nonvoter, centrist) on Thursday urged caution on further rate cuts, saying inflation risks remain while the labor market appears to be in stable condition. On the political front, Treasury Secretary Bessent warned Thursday that the funding lapse could weigh on GDP growth, while President Trump threatened sweeping federal layoffs to pressure Democrats.

EURO: The euro gained against the dollar as eurozone composite PMI was confirmed at 51.2 in September, while PPI data for August showed that producer prices declined 0.3%, missing expectations of a 0.1% drop. On a yearly basis, producer prices fell 0.6% in August, the first annual decline since November 2024 and larger than the expected 0.4% drop. A decline in energy prices led the fall, while durable consumer goods and intermediate goods prices fell. Unemployment data out of the eurozone showed that unemployment ticked higher from 6.2% to 6.3% in August, remaining near historical lows. The unemployment data likely will not cause any alarm to officials at the ECB. Eurozone inflation figures released earlier in the week showed consumer prices rose to 2.2% in September, up from 2.0% in the previous three months. The data added to expectations that the European Central Bank will leave its key interest rate unchanged for the remainder of the year.

BRITISH POUND: The sterling is little changed against the dollar following a revision of services PMI data for September. The survey showed that business activity grew at its slowest pace in five months as companies and consumers pulled back on large spending decisions ahead of the uncertainty over November’s tax hike. The survey detailed that businesses face sluggish demand, client hesitancy, and rising economic and political uncertainty, particularly surrounding the upcoming Autumn Budget. Staffing levels fell again, continuing a 12-month decline due to weak sales and pressure on bottom lines from rising staff costs and sluggish demand conditions. The persistent decline in service sector employment, driven by weak sales pipelines and rising wage costs, suggests labor market softening. Firms are cautious about hiring and are not replacing staff, which could dampen consumer spending. The survey follows a Bank of England survey that highlighted British businesses have had the weakest hiring intentions since 2020 while expecting strong consumer price inflation. BoE Governor Andrew Bailey is set to speak at a farewell symposium for Dutch central bank governor Klaas Knot later this morning. Markets are not pricing in a rate cut at the BoE’s November meeting.

JAPANESE YEN: Japanese yen futures are little changed as the currency is on track for a solid advance over the dollar this week as markets await a ruling party leadership election this weekend. The election will have consequences for Japan’s budget and central bank policies; dovish party veteran Sanae Takaichi could trigger some bond market uncertainty, while farm minister Shinjiro Koizumi and top government spokesperson Yoshimasa Hayashi are less likely to cause a stir in markets. In a speech on Friday, Bank of Japan Governor Kazuo Ueda struck a cautious tone, highlighting risk factors to the global economy, which could impact the trajectory of wages and prices in Japan, leading markets to downgrade the chance of an October rate hike from the central bank. Elsewhere, Deputy Governor Shinichi Uchida said on Thursday that the business mood is improving and corporate profits remain high even as US tariffs weigh on exports after the BoJ’s quarterly Tankan corporate survey showed confidence improved among large Japanese manufacturers.

AUSTRALIAN DOLLAR: The Australian dollar moved higher as markets shifted their expectations for the interest rate outlook from the Reserve Bank of Australia following a mix of economic data. Australian household spending rose marginally in August. Spending rose 0.1%, following a downwardly revised gain of 0.4% in July. The annual pace of spending growth slowed to 5.0%, from 5.3%. The Reserve Bank of Australia cited a pickup in consumption as one reason it skipped a rate cut this week, so a slowdown could add to the case for easing. Other figures showed Australia’s trade surplus shrank to a seven-year low of A$1.8 billion ($1.19 billion) in August as exports of non-monetary gold fell by nearly 50%. Imports rose strongly across the board, implying a risk trade will drag on economic growth this quarter. The RBA left its cash rate steady on Tuesday, citing recent data suggesting inflation might tick higher than initially forecast in the third quarter. The central bank had forecast headline inflation, which ran at 2.1% last quarter, to pick up to 3.1% by the middle of next year. Markets imply around a 45% chance of a quarter-point rate cut in November compared to nearly 100% a month ago.

INTEREST RATE MARKET FUTURES

Futures are little changed across the curve, with the long end up slightly. Markets will look to ISM services PMI data out later this morning for direction and clues on employment and price pressures in the country. The survey will be notable given that the US is a services-dominated economy.

Yields were choppy on Thursday, with upwards pressure on the front end and buying on the long end. In the absence of weekly jobless claims data and Friday’s labor report, markets relied on auxiliary figures, which pointed to a stabl but subdued labor market. Challenger job cuts fell over 30,000 from the August report, although planned job cuts were at their highest year-to-date total since 2020. Job cut announcements were driven by federal government layoffs and businesses’ responses to economic uncertainty, while a small portion was attributed to AI. Employers have planned to add just under 205,000 jobs this year, compared to around 484,000 this time last year, marking the most sluggish pace of planned hiring since 2009. Challenger did note that the weaker planned headcount was largely fueled by a steep drop in seasonal hiring. The report follows Wednesday’s weak ADP employment data that cemented expectations that the Fed will cut rates in October and added to expectations of a December rate cut. The report offered a surprise 32,000 decline in private-sector payrolls.

Meanwhile, a Chicago Fed estimate showed that the US unemployment rate held at 4.3% in September, offering a bit of a substitute for the delayed September jobs report. In Fedspeak, Dallas Fed President Logan (nonvoter, centrist) said that the last rate cut was insurance against a nonlinear decline in the labor market, with labor market conditions looking fairly balanced. Logan mentioned that employment is close to maximum and that she sees tariffs contributing to higher inflation, mainly through goods inflation, although the overall effect of tariffs has been more moderate than expected. Logan echoed a hawkish sentiment, saying that the Fed needs to guard against the risk of rising inflation expectations even if tariffs have a pass-through effect on prices.

The spread between the two- and 10-year yields fell to 53.7 bps from 55.1 bps on Thursday, while the 2-year yield, which reflects interest rate expectations, rose to 3.557%.

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