ISM Manufacturing (SEP) (10:00 EST; 14:00 GMT)
ISM Prices Paid (SEP) (10:00 EST; 14:00 GMT)
How Will The Markets React?
Conditions in the US manufacturing sector are anticipated to deteriorate for the third month in a row during September, as the Institute for Supply Management index is estimated to fall to 52.5 from 52.9. Over the past few periods, we?ve seen that the weaker US dollar has helped contribute to the new export orders? component, as American products prove to be cheaper and more attractive, while the broader new orders? index has staged a strong recovery after falling below the 50 boom/bust level last November. Meanwhile, the highest readings we?ve seen in the ISM manufacturing report have consistently been in the prices paid? component, which has only underpinned Federal Reserve Bank inflation hawks? concerns. However, the price index is expected to ease back further in September, supporting broad market speculation of additional rate cuts by the central bank throughout the rest of the year. Furthermore, the employment? component has struggled to hold above 50 throughout the year, and an index reading below that figure in September (marking a contraction) would bode very ill for this Friday?s NFP report (October 5th), especially as the US financial and housing sectors are likely to have racked up substantial job losses during the month. As a result, now that the Federal Reserve has finally started to note major downside risks to growth and has stopped focusing on inflation, signs that the labor force is diminishing could lead markets to ramp up speculation of a 25 basis point rate cut in October.
Bonds - 10-Year Treasury Note Futures
After showing some strength early during Friday?s session, 10-year Treasury Note Futures failed to hold the break past the 38 percent retracement level at 109-12, leaving the contract vulnerable to testing the recent lows in the 108-13 area. Nevertheless, Treasuries will first have to get through trendline support as the contract has worked into an ascending channel. If Monday?s US economic data proves to be weaker than expected, Treasuries could see a bit of a lift as traders ramp up speculation that the Fed will cut again.
FX - EUR/USD
EUR/USD has hit yet another record high of 1.4272 has US Dollar weakness seeps throughout the forex markets and was sparked after the Federal Reserve unexpectedly cut the fed funds rate and discount rate by 50bps each last week. Disappointing economic data hasn?t helped the case for the currency either, as home sales, labor market, consumer confidence, and inflation reports all proved to be softer-than-expected. Event risk due out of the US on Monday could continue to weigh on the greenback, as ISM manufacturing is expected to decline. If the figure is worse than expected, this could prove to be especially gloomy for the US Dollar, as EUR/USD would target a break to fresh highs near 1.4300. However, if the release of the manufacturing sector data proves to be surprisingly positive or simply suggests that Friday?s non-farm payrolls report could show a marked improvement, traders may judge that the economy may be able to weather the stormy conditions of the housing recession, which could help send EUR/USD down to test 1.4110/20.
Equities - Dow Jones Industrial Average
The Federal Reserve?s unexpected 50bp cut to the fed funds and discount rates set the stage for massive rally in US equities last week, and with the Dow Jones Industrial Average above former resistance (now support) at 13,700, the index could be targeting the July highs of 14,021. However, it is worth questioning how realistic it is to expect the Fed?s policy actions last week to fix the credit crunch that the US is facing, especially as both supply and demand for credit wanes. As a result, traders may stop riding the wave of optimism that the Fed initiated last week and instead focus on the status of the economy. If ISM manufacturing weakens more than expected, the Dow could returns its focus on a decline towards 13,700. On the other hand, if the data is actually somewhat optimistic or simply in line with expectations, the equity index could hold aloft and continue its trek towards 14,021.
Written by Terri Belkas, Currency Analyst for DailyFX.com