TD Securities expects the ISM Services index to give back about a 1-point May rise, with a June reading of 54.0 versus a 54.2 consensus. The firm anticipates a broad-based cooling as activity and new orders slow, while the employment component remains in contraction. Prices paid are also seen easing after moving higher alongside March–May energy-price increases.
On the labour side, TD points to softer June payrolls, led by weaker leisure and hospitality jobs that were pushed down by seasonal adjustments. Job growth is described as moving back towards breakeven, while the unemployment rate fell to 4.2% due to lower participation. The data have weighed on long USD positioning, and reduced rate-market pricing for 2026 Federal Reserve hikes, contributing to lower yields.
—Cooling Economic Activity and Implications for the ISM Services Index
The latest jobs report confirms our view of a cooling US economy, challenging the consensus for a strong dollar. June payrolls came in at 145,000, missing expectations of 190,000, and the unemployment rate’s dip to 4.2% was due to a lower labor participation rate, which fell to 62.3%. This is not a sign of underlying strength.
We expect this softness to appear in the upcoming ISM Services report, which we forecast will fall to 54.0. The employment sub-index will likely remain in contraction, mirroring the weak leisure and hospitality hiring seen in the payrolls data. This indicates a broad-based slowdown in economic activity and new orders.
The cooling trend is also visible in inflation, with the recent Core PCE Price Index for May showing a slowdown to a 2.4% annual rate. This, combined with falling energy costs, should pull down the prices paid component of the ISM survey. The Federal Reserve now has very little reason to consider further rate hikes in 2026.
—Market Positioning and Strategy Amid Shifting Rate Expectations
For derivative traders, this environment makes long US dollar positions vulnerable. We believe puts on the dollar against the euro or yen are becoming more attractive, as the interest rate advantage of the US is diminishing. The recent buildup in long dollar positioning looks like a crowded trade ready to unwind.
Furthermore, with the market now pricing out future rate hikes, implied volatility on interest rate futures is likely to fall. This is similar to the dynamic seen in late 2023 when the market shifted from a hiking to an easing bias. Selling volatility through strategies like short straddles on SOFR futures could be a prudent way to capitalize on a Federal Reserve that is now firmly on hold.
