More bad US data hits the markets; Gold firmly back above $1500

Summary:

• ISM non-manufacturing PMI: 52.6 vs 55.0 exp. 56.4 prior

• Gold spikes higher while USD swoons

• Stocks bounce from 5-week low as Fed cuts expected

• UK service sector enters contraction territory  

The leading industry survey for the US services sector has come in worse than expected with the ISM non-manufacturing PMI for September printing 52.6 vs 55.0 exp and 56.4 prior. Coming just two days after the manufacturing equivalent slumped to its lowest level in a decade this reading is the lowest for services in 3 years and the components also make for pretty grim viewing. New orders fell to 53.7 vs 60.3 last month while the employment index dropped to 50.4 vs 53.1 previously.   

The fall in employment puts even more pressure on tomorrow's NFP release (1:30 BST) which could serve to further confirm weakness in the world's largest economy. View our full preview here. 

This is clearly another poor data point from the US and unsurprisingly caused a clear risk-off reaction at first with Gold spiking higher and USD falling back. Gold jumped as much as $15 to trade as high as $1518/oz while the greenback was trading lower against all its peers barring the Loonie on the European close. 

The reaction in stocks was interesting with the US500 initially falling down to its lowest level since late August but since then there’s been a bit of a bounce. This perhaps comes from the markets drastically revising their rate cut expectations from the Fed with Fed fund futures now pricing a 92% probability of interest rate cut at the end of October. At the beginning of the week it was 74% and 60% at the end of the previous week. Additionally, the market sees a 60% chance of another cut in December which could mean an interest rate at 1.25% at the end of the year.   

The most recent look at the service sector has raised some serious concerns about the health of the industry with the PMI reading for September falling below the 50 mark and into contractionary territory. Coming shortly after weak readings from the manufacturing and construction sector this data makes it a triple whammy of bad news for the UK economy is as many days and points to a GDP fall of 0.1% in Q3. Should this occur then the UK would enter a technical recession under the widely held definition of two consecutive quarters of negative growth - and that’s before we’ve even got that close to the current October 31st deadline for leaving the EU.