US May ISM Services PMI: A Further Surge Ahead?

Tomorrow we will receive an almost simultaneous publication of the survey results of Markit and ISM Services PMI.

As we all know, many market prospects depend on companies increasing demand for their products and services. But, apart from that, we are also getting the release of ADP Employment change around the same time.

All these data are expected to show a significant improvement. This, counterintuitively, implies that there is more risk of a market reaction to the downside.

Depending on the data over the next two days, we could see a risk ahead of Friday’s NFP. And we might see some disappointment even if there are good numbers.

The market has a habit of becoming too optimistic, only to have to return to Earth when the real data comes in.

What’s coming

As an example of this potential overconfidence, the consensus among analysts is that the ADP private payroll will show 808K jobs added compared to the 517K reported last month.

This probably responds to analysts constantly predicting the results lately. But this would imply almost doubling the recent trend in job creation.

There are some arguments to maintain a better economic sense. On April 21, a series of state shifts eased restrictions on businesses. Even New York and California, the two most populous states, have announced that trade will be allowed to reopen.

As it stands now, only six states fall into the “mostly closed” category according to a track from The New York Times.

The possible problem

On the other hand, according to data compiled by USA Today, Americans in every state left their homes less during April than in March (DC is the only exception).

Although many states formally lift restrictions, in practice those restrictions in many cases have not been complied with. So the potential economic impact could be limited.

Decisively, the PMI surveys were conducted largely before those resources were announced. This suggests that recent optimism may not be present in the survey.

What we are looking for

Probably the biggest event of the day will probably be the PMI figure from ISM Services. Since Covid, Services (or Non-Manufacturing) PMI, has overtaken its peer. This happens when traders are looking to see when the most affected sector of the economy is normal.

According to analysts, expectations are that U.S. service companies will show another record high. The consensus on May ISM PMI data is 64.3, compared to 63.7 in the previous month.

Projections for Markit Services ’PMI, which appears a little earlier, are aimed at a stagnation of optimism at 63.1, a repeat of last month’s figure.

The question now is who is right? Have analysts overestimated how good an economy is, or will we see any further weakness in the dollar after the data release?

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