Services Outperform Manufacturing

Services Outperform Manufacturing

The trend toward higher rates following the Fed meeting continued over the past week. The economic data was roughly neutral. As a result, mortgage rates ended the week a little higher. The two closely watched ISM reports released over the last few days emphasized the divergent performance of the service sector and the manufacturing sector in the U.S. The results of the two surveys are provided on a scale from 0 to 100, and readings above 50 indicate expansion in the sector. The Services index jumped to 59, the second highest reading of the year. By contrast, the Manufacturing index fell to 50, the lowest reading of the year. Since the service sector is much more dependent on the performance of the domestic economy, it is not surprising to see a strong reading. However, the strong dollar and the weakness overseas is clearly holding back activity in the manufacturing sector. Both are important indicators of economic strength in the U.S., and taken together the indexes are signaling moderate growth. Another important recent data point was the core PCE price index, which is an inflation indicator closely watched by the Fed. Core PCE inflation was just 1.3% higher than a year ago. The Fed’s stated target for core inflation is 2.0%. A big reason that the Fed has not yet hiked rates is that core inflation has remained so low. Looking ahead, the next key Employment Report will be released on Friday. As usual, this data on job gains, the unemployment rate and wage inflation will be the most highly anticipated of the month. After that, the next big report will be the Retail Sales data on November 13. With the Fed basing their decision about raising the federal funds rate on incoming economic data, the reaction to the reports released between now and the next Fed meeting on December 16 could be larger than normal.

Speak Your Mind

*