The ISM Services Report Challenges the Consensus Outlook

Happy Monday out there, Team 42. It's your skipper here, Darius Dowd, to present our Macro Minute for Monday, October 5th, 2026. Hope everyone had a great weekend. So as always, we'll start with the executive summary from today's lead-off morning note. So let's dive right in. So what's the most important thing that we learned today is that the September ISM Services PMI report and August factory orders data did not support the consensus forecasts of accelerating growth or slowing inflation. What key macro data policy signals supported our active themes? The September ISM Services PMI report supported our resilient U.S. economy, jobless recovery, and productivity boom themes. The September ISM PMI report strongly supported our sticky inflation and play action paths to set up the run themes. The current 136 basis points spread between the 10-year nominal French oat yields and 10-year nominal German boon yields is in the 99th percentile of daily observations and data since January of 1990. We'll talk about why that supports our theme in shortly. So, and then no key macro data or policy signals challenge our active themes. So what does all of this mean for your portfolio? Concerns about French public finances have weighed on risk appetite and pushed the euro to its lowest level since May of 2025. France's fiscal position is precarious. France's deficit was supposed to shrink to 5% of GDP this year, but it's widening instead. Cough, cough. Sounds a little bit like ours. French is a 3-3-3. It might turn out to be 6-6-6. Sorry, Scott. French debt stands near 120% of GDP, roughly double. Double Germany's and some investors are comparing it to Greece's during the euro area's crisis of early 2010s. France's high debt burden is not unique, but it is extreme among major economies. France is one of the world's largest net international investment deficit economies, much like the U.S., although the U.S. is much larger. So market forces can have an outsized influence on political and economic outcomes in French society. To this point, markets are increasingly penalizing France for its debt load, which they have not typically done before. Debt now ranks higher in French public concern, polls and officials warn that interest costs now exceed defense or education outlays. This is Ferguson's law being violated in France as well, much like it has been in the U.S. All told, since the eurozone is the U.S. treasury market's largest foreign creditor on an aggregated basis, these idiosyncratic issues in European rates markets are supportive of our core belief that the geopolitically driven supply-demand imbalance in the treasury bond market continues to deepen. How can our European creditors maintain the growth of demand required to take down our bonds, if they aren't willing to buy their own? Bingo. So as always, to wrap up the question from our community, this was titled, You Demand. It says, Dede and team, I just soaked in another great Around the Horn webcast. Please know that I truly appreciate all the time and effort you put into the data, the analysis and the presentations. This is the most thorough and concise economic analysis I have ever seen. Thank you for the kind feedback. It says, keep up the good work and enjoy your world. Deserve vacation in Europe. Many thanks and God bless. God bless you as well, my friend. The question here is in the second half of this post here. It says, second that, was getting nervous. Do PE charts, private equity on Blackstone and KKR signal some stress in the credit markets? On Tuesday, it was just Blackstone. Now KKR seems to also be downtrending no longer. And so finally got around to skim through that Brookings Institute paper called Financing the AI Buildout from September 24, 25. And it was surprised. And I was surprised by the alleged substantial off-balance sheet debt buildup by just a few hyperscalers. Looking for most recent, Dr. Mo, BIZD signal, those are BDCs, a signal that I realized most factors are red or yellow. Seems I missed that on Friday's ATH pivot. Now I can relax, check and rebalance my portfolio by mundane refocus on my real life challenges ahead. Thanks and best wishes to DD and Team 42. So thanks for the kind feedback, guys. Really appreciate you. So just want to flag one quick thing on this breakdown in private equity stocks. In our view, the issues in private credit have more to do with technical flows and the lack of money that is being, the money that is being diverted away from it. From that asset class than it does with a broad credit cycle risk. Every metric we look at, we look at our business cycle model. We look at our Fab Five recession signaling indicators. You look at initial and continuing jobless claims. You go deep into the labor, into the jobs report like we do every month. In the jobs report data, you look at some of the other leading indicators of the business cycle. This economy is nowhere near recession. I mean, again, nominal GDP as government and net exports is currently growing 8.4% on a quarter over quarter start basis. 8.4%, that's double the pre-COVID trend rate. So this economy is booming. It's very far from recession. And as a function of that, you have negative credit gaps and a negative debt service ratio gap in the statistics. And so a negative credit gap just means the deviation from trend of the private non-financial sector credit to GDP ratio is a negative feature. And as well as the deviation from trend for the private non-financial sector debt service ratio. That is also a negative feature. That is also a negative trend. So we are deviating negatively from trend in time series that historically need to be deviating positively from trend to signal capital misallocation or adverse selection. Capital misallocation meaning you're lending to the wrong, too much to the wrong sectors in the economy and our adverse selection means you're lending too much to the wrong borrowers within the economy. It's highly unlikely that you have adverse selection or capital misallocation in a business cycle where the credit gap is negative and the debt service ratio gap is negative. Debt service ratio, I think it's down at 14% for the private non-financial sector. That number is basically at an all-time low. Historically, you got to get up to 17 to 18 to 19% before you're worried about a recession. So we got a long way to go, a lot of hay to bale in that metric. And so going back to this question, a lot of the issues that we're seeing in private credit have more to do with the supply demand of the asset class than they do with the actual underlying borrowers and the health of the underlying borrowers and the health of the economy. So just keep that in mind as you navigate this. Doesn't mean you need to run and buy private credit, but just be understanding of kind of how to contextualize this risk a little bit better than the newspapers are tickling your amygdala about. So we'll wrap it up there. Darius Day here presenting our Macro Minute for Monday, October 5th, 2026. As the question implies, I'm going to be gallivanting throughout Europe this week. So we will catch back here, I want to say next Tuesday was the next time you'll see us on a Macro Minute. So everyone have a wonderful week. If you're a 42 Macro member, just check the dashboard every day. We'll update the signal section. We'll update all the charts, all the analysis that we feature in the late-off morning note. We'll catch you back here next week. Cheers. If you enjoyed this content, please remember to like and subscribe. Thank you. This content is for informational purposes only and does not constitute an offer or a solicitation. Reliance upon the information in this material is at the sole discretion of the viewer or listener. Investing involves risks. Any reference to a company, issuer, or investment strategy is for instructive purposes only and does not constitute investment advice. For full disclosures, visit 42macro.com. Backslash disclaimer.