Stagflation fears from US ISM Services PMI data trigger profit taking in US stocks. The US dollar is subdued while Asian markets see positive performances, led by Australia and Japan.
A soft US dollar is supporting Asian equities, US stock indices pulled back over stagflation fears
Stagflation fears crept back into the US economy yesterday, triggered by the latest reading from the ISM Services PMI, which led to a bout of profit-taking activities in the US stock market after sharp intraday rallies were seen on Monday, 4 August.
On Tuesday, 5 August, the S&P 500 and Nasdaq 100 shed -0.5% and -0.7% respectively, while the Dow Jones Industrial Average outperformed with a smaller intraday loss of -0.1%, thanks to a minor gain of 0.1% seen on the Dow’s third biggest component stock, Caterpillar, ex-post Q2 earnings results.
Caterpillar’s management offered an optimistic view of ongoing support of Caterpillar’s products due to US federal infrastructure spending and increased energy build-out to negate headwinds from tariffs.
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Services activities in the US, which contribute almost two-thirds of US economic growth annually, turned flat in July, where the ISM Services PMI unexpectedly fell to 50.1 from 50.8 in June, below forecasts of 51.5.
In contrast, the ISM Services Prices Paid sub-index, a measure of input costs in the U.S. services sector, climbed to 69.9 in July, its highest level in nearly three years, up from 67.5 in June. This rise in input costs, coupled with slowing growth in services activity, raises concerns about potential stagflation.
Despite the emergence of stagflation risk, the US dollar was muted yesterday as the US Dollar Index trimmed its intraday gain of 0.5% to end Tuesday’s US session almost flat.
The subdued performance of the U.S. dollar has been reinforced by continued dovish expectations for interest rate cuts, as reflected in Fed funds futures pricing. According to the latest CME FedWatch tool at the time of writing, there remains an 87% probability that the Federal Reserve will implement a 25-basis point cut at the upcoming FOMC meeting on 17 September.
Also, US President Trump said that he would make his decision this week on a replacement for the outgoing Fed Governor Kugler, who resigned last Friday. Hence, Kugler’s replacement is likely a “dove” who supports Trump’s call for a more dovish US Federal Reserve, in turn, may trigger a negative feedback loop into the US dollar.
Currently, the greenback is trading lower in today’s Asian session; the top-performing major currencies against the US dollar on an intraday basis are NZD (0.3%), AUD (0.3%), and JPY (0.1%).
Also read: Q2 2025 earnings: Will the “Magnificent 7” sustain US market momentum?
A weaker US dollar is also creating a tailwind for Asian equities.
Most Asia Pacific stock markets are showing positive intraday performances today. Japan’s Nikkei 225 inched higher by 0.5% reinforced by a further increase in Japanese wages. Australia’s ASX 200 jumped by 0.8% to hit a fresh all-time high, and Singapore’s Straits Times Index rebounded by 0.2%, on track for its third consecutive session of gains. Hong Kong’s Hang Seng Index traded flat at 24,900, holding slightly above its 20-day moving average, acting as an intermediate support at 24,790.
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