ISM services beat dims rate-cut odds as gold steadies at $4,463

A stronger-than-expected reading on US service sector activity is complicating the Federal Reserve's easing calculus, yet bullion has held its ground. The ISM Services PMI registered 55.4 in August — 1.3 points above July and ahead of the 54.3 economists had penciled in — and spot gold last traded at $4,463.57 per ounce, up 1.72 percent on the day.

"In August, the Services PMI registered 55.4 percent, an increase of 1.3 percentage points compared to July's figure of 54.1 percent," Steve Miller, Chair of the ISM Services Business Survey Committee, said in the report. "The Business Activity Index remained in expansion territory in August, increasing 2.6 percentage points to 61.7 percent."

The New Orders Index climbed 3.7 points to 60.9 percent, its highest since February 2023, while the Prices Index rose to 72.6 percent — the highest since August 2022 — as tariffs and Middle East conflict returned as the most cited supply chain concerns. The Employment Index contracted for a second straight month at 47.8 percent, though the share of companies cutting staff fell to 17.1 percent from 19 percent in July.

The data complicates the Fed's rate-cut calculus. A resilient services sector with accelerating price pressures gives policymakers less reason to ease, which typically pressures gold — a non-yielding asset that benefits from lower rates. Yet spot gold was up 1.72 percent on the day at $4,463.57 per ounce, after touching a session high of $4,496.01, as dollar weakness from Wednesday's soft ADP employment report and inflation-hedging demand offset the hawkish repricing.

The ISM report showed 12 of 17 services industries expanded in August, with Business Activity at 61.7 percent — its highest since November 2022 — and New Orders at 60.9 percent, its strongest since February 2023. The Prices Index has now exceeded 60 percent for 21 consecutive months, with its 12-month average climbing to 68.5 percent, the highest since April 2023. Fuel, diesel, and gasoline were again reported up in price, while GPUs and steel were added to the short-supply list.

The employment picture remains the soft spot. The Employment Index has been below 50 percent in 13 of the last 18 months, and respondents cited difficulty backfilling positions and hiring freezes in some sectors. However, Miller noted that the Business Activity and New Orders indexes at multiyear highs could point to a shift toward increased employment in the services sector.

Rate path and gold's next test

The ISM beat follows a soft ADP private payrolls report on Wednesday that had weighed on the dollar and supported gold. The conflicting signals leave the Fed navigating between a resilient activity side and a cooling labor market, with inflation still running above the 2 percent target. Fed Chair Kevin Warsh and other officials have kept rate-hike speculation alive in recent comments, according to FXStreet.

For gold, the tension is between the inflation-hedging bid and the opportunity cost of holding a non-yielding asset in a higher-for-longer rate environment. The last time the Prices Index exceeded 70 percent for five of six months was in 2022, when the Fed was in the middle of its most aggressive tightening cycle in decades. This cycle, gold has already climbed past $4,400/oz, reflecting a different macro regime where central bank buying and geopolitical risk provide a structural floor.

The ISM report also noted that the August Services PMI reading of 55.4 corresponds to a 2.3-percentage point increase in real gross domestic product on an annualized basis, with the overall economy expanding for a 75th straight month. The reading sits 1.7 percentage points above the 12-month average of 53.7 percent.

The next ISM Services PMI report, covering September data, is scheduled for release on October 5. The September US jobs report and the Fed's next policy meeting will provide the next catalysts for the rate path and, by extension, gold's direction.

This article is for informational purposes only and does not constitute investment advice.