US services sector activity slowed in September while price pressures built, the Institute for Supply Management reported October 5, in a release covered by Reuters. The slowdown matters more than usual this month because it lands days before the Federal Reserve’s October 28 decision, the first meeting since the central bank resumed raising rates in September.
Our ISM services article: US services slow as costs rise.
The statisticians’ message is uncomfortable for policymakers. Activity is cooling, but the did-not-read-the-memo part is pricing. Respondents to the ISM survey described demand strong enough to stretch supply chains and push prices back up. That combination is the one that argues for another rate increase, not for the pause markets were starting to build in.
What the report said
Reuters’ summary of the release points to two facts at once: a slower headline reading for the month, and continued domestic demand that kept orders flowing and suppliers stretched. It is the inflation part that will draw votes. After September’s 25 basis point hike to 3.75-4.00 percent, 16 of 18 Fed officials projected at least one more increase this year in the September round of projections.
Markets spent late September pricing out an October hike as bond yields climbed across the curve. The 30-year Treasury yield hit a 24-year high at the start of the week, a level covered in detail by Motley Fool’s market desk. Stock futures pointed lower going into Monday’s ISM release. A services report that flags rising costs gives the hawks their argument back, and it makes the October 28 meeting less likely to end with applause from either the bond market or the equity one.
What the survey components hint at
The headline number gets the attention, but services surveys are read less for the level than for the direction of the components. Business activity down while new orders hold is a growth slowdown without a demand collapse. New orders down while backlogs fall is a demand problem. Prices up while supplier deliveries lengthen means bottlenecks and margin pressure moving down the chain, the classic input-cost pass-through phase that shows up in consumer inflation six months later. The Reuters summary points at exactly that pass-through pattern: supply chains stretched by domestic demand, with prices moving the wrong way.
That is also why the ISM release carries weight beyond its 45-minute headline shelf life. Fed staff read both ISM and S&P Global versions monthly, and a services-side price signal at this point in the cycle, with core services inflation already the sticky part of the CPI basket, feeds directly into the projection materials for the October meeting.
The same story abroad
The US is not the weird one here. Canada’s services PMI showed the sector contracting for a fourth straight month in September, with tariffs and war-related disruption doing the damage. Japan’s final services PMI slipped to 51.3 from 52.5, the composite the weakest since May, and S&P Global’s survey commentary flagged slower new orders and export business declining at the second-fastest pace since January 2021.
That pattern, services shrinking or stalling while prices stay sticky, is the worst version of the setup for any central bank with a mandate on both sides. India’s RBI is meeting October 5-7 and is expected to hike for the first time since 2023, bringing its policy rate to 5.50 percent. If the US services data reads the same way next month, the October decision starts to look like a coin flip between hold and hike rather than the cut markets briefly imagined.
Where markets stood
Fed funds futures had been quietly moving toward a hold for October through the second half of September, a shift that followed the surprise September hike. WTI eased to $89.50 after a diesel squeeze pushed Brent above $120 last week, and the pullback in oil helps the inflation picture at the margin. Aramco cut November Asian prices to a six-year low on Sunday, a sign the physical market is not screaming shortage either.
The problem is services. Energy eases and services costs do not move with it, and the ISM survey’s price component has been drifting the wrong way all quarter. If the September and October readings both stay elevated, the December meeting becomes the live one for a hike.
Equity positioning complicates the picture further. Tech carried the tape into Monday, with Nasdaq momentum riding on Nvidia speculation about a $6 trillion market cap even as yields climbed. That combination, multiple-heavy index gains priced off of falling real yields, is exactly what a hawkish Fed response to services inflation would unhinge worst and fastest. The 30-year yield’s move alone has already done some of the central bank’s tightening for it, which cuts both ways: the Fed can point to it as evidence that conditions are restrictive enough, or the hawks can argue rates should follow inflation rather than assume the bond market will finish the job.
What to watch this week
The rest of the week fills in the picture ISM started. Treasury yields are the transmission mechanism traders will watch first, since a 30-year yield at 24-year highs is already doing restrictive work that the Fed does not have to replicate with policy. Private payrolls and jobless claims later in the week will settle whether domestic demand is as real as the ISM respondents say it is. If it is, the Fed’s October choice stays tense. If demand cracks along with activity, the growth question returns and the inflation conversation shifts again.