US Dollar, Dow - One May Have To Give Up Its Trend With An ISM Surprise

ISM Manufacturing Index (APR) (14:00 GMT)
Pending Home Sales (MAR) (14:00 GMT)
Expected: 51.0
Expected: 0.2%
Previous: 50.9
Previous: 0.7%

How Will The Markets React?

US event risk began in earnest Monday - and this time it has actually aroused the market’s interest. Last week, a number of high-flying economic indicators promised volatility across the major American investment instruments. However, despite the significance and relative surprises these figures afforded traders, there were only muffled reactions in price. This all changed on Monday though. Compared to Friday’s GDP report, this morning’s personal spending and income and PCE numbers seemed blatantly second tier - especially since the quarterly numbers encompassed the March indicators. Yet, the investment community must have been caught off guard by the drag in spending and tame price pressures; because Treasuries yields, equities and the dollar were all on the move lower after the figures hit the wires. Now, with traders tuned back into the economic calendar, the manufacturing sector comes back under the spot light. Due for a 14:00 GMT release, the ISM manufacturing survey could revive concern over the true anchors on the economy. Friday’s growth report clearly shows expansion is faltering, and that the economy may fall faster towards a hard landing as the buoyant consumer sector looses its clout. While the housing market is obviously a greater risk to the US economy, its drag on the economy is well documented and largely priced in. On the other hand, factory activity is gasping to keep its head above water and has not yet been put on a path to rebound or dip fully into recessionary territory. Therefore, traders are waiting to see whether the manufacturing sector will help to usher in the hard landing pessimists are calling for or otherwise pick up some of the slack from slower consumer spending. The market is officially expecting the April ISM read to hit the wires at 51.0, which is a slight pick up from March’s number. This doesn’t seem too far fetched since most of the regional numbers came inline; but it also opens the market to a surprise.
Bonds - US 10-Year Treasury Note Futures
T-note futures have been trudging along since the break above 107-25 two weeks ago. This was wholly unexpected though since a number of high-level economic indicators have run across the ticker since then. However, event risk and fundamental traders may have regrouped as of Monday. The catalyst for Treasury traders was obviously the PCE data which refuted the move higher in the consumer and GDP price indices by cooling significantly. While tomorrow’s economic calendar will not add to the inflation outlook that traders are obviously shaping, it could up the pressure on a Fed cut through growth channels. The ISM manufacturing index is expected to hold above the pivotal 50 level. However, a consensus that is only 0.1 points above the previous month’s read is always subject to surprises.


EUR/USD has continued to hold in a tight range of congestion, probing Friday’s fresh highs near 1.3680. While it appears that this pattern will hold until Friday when the notorious Non-Farm Payrolls release hits the tape, traders should keep on eye on the pair amidst a spate of US economic data. Tomorrow we have ISM Manufacturing, which is forecasted to edge mildly higher. Recent regional reports for the sector have not strayed far from estimates, so a large ISM surprise this time around is unlikely. However, markets will be honing in on the employment and price components. The employment gauge will be pertinent in attempting to gauge Friday’s NFP report, while traders will look towards the price index for a look at potential inflation pressures at the factory fate. Nevertheless, US fundamentals appear to be pointing towards a substantial slowing in multiple facets of the economy, but with the US dollar so greatly oversold, the currency could be due for a substantial bounce any day now.

Equities - S&P 500 Index
Equities in the US eased back for the third consecutive day as a surprising divergence between personal income and personal spending crushed expectations for strong consumption growth. The S&P 500 lost 0.8 percent to 1482.37, led by companies such as Target and Coach, as 29 of the 30 retailers in the Standard & Poor’s 500 Index fell. Target, the country’s second-biggest discount chain, dropped $1.40 to $59.37 while home-improvement retailer Home Depot fell 60 cents to $37.87. Coach Inc., the largest US luxury leather handbag maker tumbled $2.42 to $48.83. Meanwhile, shares of Hilton, the second-largest hotel company in the US, slumped $1.32 to $34 after 2007 profit forecasts missed estimates.
While Monday’s economic data had a hard impact on US equities, ISM manufacturing may not have the same effect. The figure is anticipated to edge mildly higher to 51.0 from 50.9, and as long as the release does not deviate widely from forecasts, traders are likely to brush off the release. However, markets will be honing in on two things: the employment component and the price component. The employment gauge will be key in order to gauge Friday’s NFP report, while traders will look towards the price index for a look at potential inflation pressures at the factory fate. Nevertheless, the picture for the S&P 500 does not look pretty, as the index’s hesitancy to break the 1,500 level may signal that further declines loom on the horizon.