Implications:  Activity in the US service sector accelerated in October as the ISM Services index increased to 56.0, the fastest pace in more than two years.  The rise in activity was broad-based, with fourteen out of eighteen major industries reporting growth and two reporting contraction.  Looking at the details, the increase in the overall index can be attributed to higher readings for the employment index and the supplier deliveries index, which both rose by four or more percentage points.  Comments from survey respondents reveal that hurricanes and port strikes boosted the supplier deliveries index, signaling longer lead times.  Meanwhile, the employment index rose to the highest level in more than a year to 53.0, although growth was split, with just half (nine) of the major industries reporting an increase in employment and five reporting a decrease.  The indexes for business activity and new orders both declined by two percentage points but sit firmly in expansion territory at 57.2 and 57.4, respectively, signaling growth.  Finally, inflation remains a problem in the service sector.  The prices paid index came in at the highest level for any category in the report at 58.1, with fifteen out of eighteen major industries paying higher prices.  While monetary policy is tight (the M2 measure of the money supply is still down 2.3% from its peak in early 2022), it is less tight than it was before the Federal Reserve cut rates by 50bps at its last meeting.  Though we expect the Federal Reserve to continue with a 25bps cut at the meeting this week – the embers of inflation still remain – and there are serious risks that an overly aggressive path of cuts could bring with them a pickup in the M2 measure of money, and with it a return of inflation.

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