TD Securities expects US services activity to strengthen, with the ISM Services Index seen rising in May to 54.7 from 53.6, versus a 53.8 consensus. The firm attributes the projected lift to firmer new orders and slower supplier deliveries, linking the latter to supply chain disruptions associated with the Iran conflict. Attention will also fall on the prices paid component as a gauge of inflation pressure tied to elevated energy costs.
The week’s diary includes Wednesday releases for ISM services, ADP employment and S&P services PMIs, alongside speeches from Fed officials Barr and Logan and the Fed’s Beige Book later in the day. Separately, JOLTS job openings data have shown strength, although leading indicators imply the April rise may be overdone and vulnerable to mean reversion in May, with April’s increase concentrated in professional and business services. TD Securities points to mixed labour-market ratios but frames the broader signal as stabilisation, while flagging that Middle East ceasefire developments could eclipse US data for market pricing ahead of Friday’s NFP.
Geopolitical Volatility and Trading Strategies
We believe geopolitical headlines from the Middle East will create more market volatility than the upcoming US economic data. The VIX index has already climbed to 19.5 in the last week, reflecting this tension. Therefore, strategies that benefit from increased price swings, such as buying straddles on the SPX, should be considered over the next few weeks.
Market Implications and Tactical Views
We anticipate a strong ISM services report this week, with the prices paid component likely showing persistent inflationary pressure from energy costs. Recent CPI data already showed core inflation ticking up to 3.7% last month, surprising analysts. A hot ISM number could push back rate cut expectations, making short positions on September SOFR futures an attractive hedge against a more hawkish Fed.
While labor market ratios suggest stabilization, April’s JOLTS report showed a surprise jump to 9.1 million openings, which we view as statistical noise likely to reverse. This mixed messaging heading into Friday’s NFP report creates an opportunity for event-driven trades. We would consider buying short-dated options on currency pairs like USD/JPY to capitalize on the initial spike in volatility immediately following the release.
The ongoing supply chain issues tied to the Middle East have kept WTI crude futures consistently trading above $95 a barrel for the past month. We see continued strength in the US dollar if this week’s services and labor data confirm a robust economy that can withstand higher energy costs. Traders could look at buying call options on the UUP dollar index ETF as a direct way to play this theme.
