Activity in the U.S. services sector, by far the largest component of the world's biggest economy, slowed notably in September, the ISM Purchasing Managers survey indicated Thursday, falling to the lowest level in more than three years.
The headline ISM index slipped to 52.6 points last month, well shy of the Street consensus of 55 points but still modestly higher than the 50 point mark that generally separates growth from contraction. The employment component of the survey also remained over the 50 point mark, at 50.4, but slowed notably from the August reading of 53.1 and could suggest a weaker non-farm payroll report for the month of September.
"Tariffs are adding uncertainty to short-term pricing on certain commodities, but suppliers are finding alternate solutions," one of the survey respondents said. "The bigger impacts appear to be on demand side, which is driving short-term favorability in certain domestic markets."
The Dow Jones Industrial Average fell sharply on the data, slumping more than 280 points to extend the benchmark's October decline to around 3.35%. The broader S&P 500 was also weaker, falling 21 points to take its October slump to around 4%.
The U.S. dollar index, which tracks the greenback against a basket of six global currency peers, slipped 0.3% to 98.68 following the ISM release, while benchmark 10-year U.S. Treasury bond yields fell 8 basis points to 1.517%.
The CME Group's FedWatch tool now suggests traders are pricing in a 95% chance of a Fed rate cut when the central bank meets later this month in Washington, up from just 40% at the end of last week.
The data follows a similar, yet far more gloomy, assessment of the U.S. manufacturing sector, where activity slowed to levels last seen during the depths of the global financial crisis last month.
The US factory activity slide followed a warning from the World Trade Organization on global commerce earlier Tuesday, with the international body cutting its global merchandise trade growth forecast to 1.2% from 2.6% for 2019.
"The darkening outlook for trade is discouraging but not unexpected. Beyond their direct effects, trade conflicts heighten uncertainty, which is leading some businesses to delay the productivity-enhancing investments that are essential to raising living standards," said WTO director general Roberto Azevêdo. "Job creation may also be hampered as firms employ fewer workers to produce goods and services for export."
The employment component of the index fell 1.1 points from August to 46.3, the survey indicated, while the new orders reading edged up, to 47.3 from 47.2 points in the previous month.