Services Sector Improves

Overview: During another light week of economic data due to the government shutdown, the biggest market-moving news was a report that showed greater than expected strength in the services sector. As a result, rates ended the week a bit higher.

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The most significant economic reports released this week came from the Institute for Supply Management (ISM), and they revealed contrasting results. The ISM Services Index jumped to 52.4, well above the consensus forecast of 50.5, reaching the highest level since February. Readings above 50 indicate an expansion in the sector and below 50 indicate a contraction. Since services account for over three-quarters of U.S. economic activity, this data is an encouraging sign for future economic growth. However, the ISM Manufacturing Index fell to 48.7, below the consensus forecast. This was the eighth consecutive month under 50, as manufacturing companies continue to lag behind services firms. Longer term, higher tariffs could help boost domestic manufacturing industries.

With the government shutdown, economic data from alternative sources continues to gain importance for investors. According to jobs site Indeed, employment opportunities declined to the weakest level in almost five years. The firm’s Job Postings Index dropped this month to the lowest reading since February 2021, during the pandemic. A smaller number of postings suggests that there is less competition for available workers, meaning that companies have less need to raise wages to hire enough employees. This reduces future inflationary pressures, which is good for mortgage rates.

On Thursday, the European Central Bank (ECB) held benchmark interest rates unchanged at 2% for the third straight meeting, down from a record high of 4% in the middle of 2023. This move was widely anticipated, and the market reaction was minor. According to ECB President Christine Lagarde, monetary policy is in a “good place” for now. She noted that reduced global trade tensions and the ceasefire in Gaza eased downside risks to economic growth.

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ISM Services Index

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Week Ahead

Investors will continue to monitor comments from government and Federal Reserve officials about tariffs and changes in monetary policy. With the government shutdown, it looks like it will be another light week for major economic data. The monthly Employment Report is scheduled for release on Friday, but it is expected to be delayed. Mortgage markets will be closed on Tuesday for Veterans Day.