The ISM Non-Manufacturing report for the month of July reached 58.1 – well beyond expectations and deep into the expansionary territory. It represents a milestone for the American economic recovery, and the focus now shifts to other reports to confirm this is not just an isolated event. 

The stock market celebrated the news – the Dow Jones traded with a bid tone and closed well above the 27,000 level. Investors keep buying equities despite over thirty million Americans being unemployed, and reports like the ISM Non-Manufacturing fuel optimistic expectations about the future.

What Is New In the July 2020 ISM Non-Manufacturing Report?

To start with, the headline number is not the highest in the report. A close look at the details reveals that the business activity index reached 67.2%, and the new orders index settled even higher at 67.7%.

There is a huge discrepancy between various businesses within the services sector. For instance, in the utilities sector, business activity is back to pre-COVID-19 levels, and stalled projects are starting back up. However, in some other areas like support services, the outlook is not so bright but still overall positive. All in all, any business is welcomed, and companies, as well as workers, try to make the most of the current situation.

But not all is bright with this July report. Some areas, critical ones, still contract. Employment, for example, contracted when compared with the previous month.

This is an area closely watched by traders and investors during the NFP week because it offers an idea about what the NFP might show. This week we had both the ISM Manufacturing and Non-Manufacturing reports revealing the same thing – the labor market still contracting.

More importantly, it contracts from contracting territory (i.e., from below 50). In the case of yesterday’s report, the employment component fell to 42.1 from 43.1 in June. Hence, a move deeper into contractionary territory. New export orders fell too, but from growing territory.

Overall, a good report but not a bright one. Until the employment component breaks into expansionary territory, any positives of a PMI report should be interpreted with a grain of salt.

The report impacted the USD in the sense that it contributed to renewed risk-on sentiment. That means that besides higher stocks, the major USD pairs like AUDUSD, EURUSD, GBPUSD, moved higher, and USDCAD or USDCHF lower.