The September ISM Non-Manufacturing Index that measures sentiment on Services disappointed consensus expectations by dropping to 52.6 vs. the estimate of 55.0.  Remember, anything above 50 suggests expansion, but the disappointing reading has already nervous investors on edge.  Similar to the ISM Manufacturing Survey, the drop reflects the same level of slowdown as the prior two mini-recession periods we have been discussing (Figure 1).  While this should not be unexpected, it is likely to cause the Fed to become more aggressive in easing short-term interest rates that would help re-steepen the 2-10-year U.S. Treasury Yield Curve.


At the last FOMC press conference, Fed Chair Powell stated the Fed would be more aggressive in lower rates if the data worsened…well both the manufacturing and services sectors are showing signs of worsening.  According to Bloomberg, the probability of a 25 basis point rate cut at the October meeting has jumped to 89% vs. under 50% just a few days ago.  We remain in the “don’t fight the Fed” camp.

All data points and estimates are sourced from Bloomberg as of 10/03/19 unless noted otherwise.

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