The Federal Reserve makes its next rate announcement on June 19, with the odds of a rate cut at 27.5%, according to the CME FedWatch Tool. However, the latest positive U.S. economic data might dampen such speculation.
The Institute for Supply Management (ISM), an association of purchasing managers, reported Wednesday that its service index rose to 56.9 last month, up from 55.5 in April. Readings above 50 point toward continued growth.
Today’s reading was against expectations for a marginal fall in the index and indicates that the services side of the U.S. economy accelerated in contrast to its manufacturing counterpart, said CIBC economist Katherine Judge in emailed commentary on Wednesday.
Likewise, BMO senior economist Jennifer Lee said in a report that, while manufacturers “struggle under the weight of tariffs, non-manufacturers appear to be holding up well in the face of uncertainty.”
The reading is especially significant considering that non-manufacturing accounts for about 80% of the private sector economy, she said.
The service sector has been expanding for 112 straight months, according to the ISM index. Of the 18 industries in the survey, 16 said in May that they were expanding, adding one positive voice to April’s count, Lee noted.
While today’s data won’t end speculation of a rate cut this year, it should temper expectations for the Fed’s June rate announcement, assuming forthcoming economic data doesn’t surprise to the downside, Lee said.
A positive indicator for the eurozone
In the eurozone, a closely watched survey shows the economy picked up steam in May to expand at a three-month high rate, also thanks to the service sector.
Financial information firm IHS Markit said Wednesday that its purchasing managers index—a broad gauge of economic activity across manufacturing and services—for the 19-country single currency bloc rose to 51.8 during the month, from 51.5 in April. Anything above 50 indicates an increase in output.
A broader assessment of the survey, which will form part of Thursday’s analysis by the European Central Bank’s policymaking panel when it sets interest rates, showed the services sector largely behind the growth, with manufacturing lagging. Germany, Europe’s biggest economy, also saw growth accelerate.
However, the firm’s chief business economist, Chris Williamson, said prospects for the year ahead are “gloomier.”
In April, the International Monetary Fund downgraded its economic outlook for several regions, including the Euro Area, the growth forecast of which dropped 0.3% to 1.3% for 2019.
Last month, BMO Capital Markets forecasted that the ECB will hold rates while it assesses whether improvement in economic activity has staying power and as global tariffs potentially take hold.