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U.S. Services Expand, Dollar Cues Higher

Posted by Joseph Trevisani on Aug 5, 2014 10:11:00 AM

The American service sector expanded at its fastest pace in more than eight years joining manufacturing industries in a strong start to the second half of the year.

The Institute for Supply Management reported that its non-manufacturing index rose to 58.7 in July from 56.0 the previous month. It was the highest reading since December 2005. The median prediction from the Bloomberg survey of economists was 56.5.  A score greater than 50 indicates expansion, below contraction.

After the ISM release at 10:00 am the dollar touched its best level against the euro in ten months at 1.3357 as traders speculate that the improving economy could lead to earlier rate increases by the Federal Reserve.

The euro had peaked against the dollar at 1.3393 in early May and has since lost 4.5 percent versus the American currency. It is currently resting at the 50 percent retracement of the April 4th to May 8th run (1.2746-1.3993).

On June 5th the ECB cut its main-refinance rate to a record low of 0.15 percent. President Mario Draghi has repeatedly said that he strong euro is a drag on the euro zone recovery. The central bank governing board meets again in two days and though no major policy initiatives are anticipated Mr. Draghi is expected to once again reference the high euro as at least a partial antidote to the low inflation plaguing the eurozone.

Overall consumer inflation in the EMU fell to 0.4 percent on the year in July from 0.5 percent the prior month. It has plunged an ominous 70 percent in twelve months. Last August CPI was 1.3 percent, in July and June 2013 it was 1.6 percent.  Despite the ECB's rhetorical and policy efforts inflation has been steadily decreasing for more than three years. 

The boost in activity in the U.S. service sector in July was matched by the increase in the manufacturing industries whose ISM index rose to 57.1 on the month from 55.3 in June, the best level in over three years.

It is hoped by analysts that the steady supply of new jobs,  payrolls have risen by more than 200,000 for five months, will  provide more disposable income to the economy  and fuel  a cycle of increasing demand followed by more jobs and yet more consumption. 

 The details of the non-manufacturing ISM were, except for prices, stable or higher. Business activity jumped to 62.4 from 57.5. New orders had their best month since August 2005 at 64.9 and have jumped 14.5 points this year. Employment was at 56.0 in July up from 54.4 for the best measure since January. Prices fell slightly to 60.9 from 61.2.

In a separate report U.S. factory orders raised 1.1 percent in June almost double the 0.6 percent forecast. May's result was revised down to -0.6 percent from -0.5 percent. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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