Bill Diviney, the senior economist at ABN AMRO, notes that the U.S. ISM Nonmanufacturing Index (NMI) declined to a three-year low of 52.6 in September, down from 56.4 in August, and well below ABN AMRO’s (54.5) and consensus (55.0) estimates.

• “The fall was fairly broad-based among sub-indices, but particularly concerning was the drop in Employment (to 50.4 from 53.1) and New Orders (to 53.7 from 60.3) indices, which suggests weak confidence in the manufacturing sector – linked to the trade war – is spreading to the services sector.
• While the relationship between the NMI and services activity (observed for instance in private consumption growth) is not as strong as the relationship between the manufacturing PMI’s new orders index and business investment, directionally it does suggest a slowdown in services is on the horizon.
• This is consistent with our view that the weakness in manufacturing will ultimately drive a broader slowdown – via slower job growth, and in turn consumption. Markets have reacted accordingly, with OIS forwards moving closer to our expectation of two more Fed rate cuts this year; an October cut is now 88% priced (previously 80%), and an additional December now 72% priced (previously 60%).”