Euro-zone Manufacturing PMI (JAN F) (9:00 GMT; 5:00 EST)
Expected: 52.6
Previous: 52.6

US ISM Manufacturing (JAN) (15:00 GMT; 10:00 EST)
Expected: 47.3
Previous: 48.4 (R+)

What Are The Markets Facing?

Glance over a financial newspaper and you’re almost guaranteed to see the word “slowdown” or “recession” in the text. Indeed, the Federal Reserve’s rush to slash the federal funds rate a total of 225 basis points since September 2007 along with rapidly deteriorating economic conditions in the US has sparked fears that global expansion is in for a major downturn. There is no doubt the US economy is in trouble after Q4 GDP grew a very tepid 0.6% (annualized), down from 4.9% during Q3. Meanwhile, Europe doesn’t appear to be faring well either after retail sales in Germany – the Euro-zone’s largest economy – fell for the third consecutive month despite consistent improvements in the labor markets. Falling consumption is not only a negative point for domestic growth, but for global growth as well, as export demand has started to falter and has been reflected in trade figures globally. Countries that are particularly dependent upon exports for growth, such as Germany, Japan, and Canada – the biggest trade partner of the US – are especially vulnerable. As a result, the release of manufacturing PMI on Friday – which gauges output by producers – will reflect if domestic and foreign demand for manufactured goods is holding up or taking a hit. The flash estimate for Euro-zone manufacturing PMI has shown output levels holding study, while new orders have fallen back. Meanwhile, the US ISM Manufacturing index is forecasted to show that the sector has contracted for the second month in a row. Though this sector isn’t the mainstay of the US economy, the news will certainly not deter speculation that the nation is in, or nearing a recession. Furthermore, if consumers and businesses in the US and Europe aren’t purchasing goods domestically, they probably aren’t doing so abroad either, which may only raise the risks that global expansion is in for a broad slowdown this year.

Bonds – 10-Year Treasury Note Futures

The rebound in Treasuries on Wednesday occurred after prices tested the bottom of the range that has formed during the last two weeks at 115-24, subsequently keeping the rally in the contract alive. However, a break above 117-15 is necessary to demonstrate more bullish potential, and the bearish tone in the equity markets and upcoming US economic data may help. On the other hand, a break below 115-24 may target support near 114-20.

FX – EUR/USD

The Federal Reserve’s 50bp rate cut on Wednesday helped propel EUR/USD up towards 1.4900, though after multiple tests, the pair has still not been able to push through. However, with fed fund futures pricing in another round of rate cuts in March and the European Central Bank maintaining a staunchly hawkish tone – which may only be exacerbated after flash estimates pinned Euro-zone CPI at a whopping 3.2% - it may only be a matter of time before the pair takes its rally towards the record highs and the psychologically important 1.50 level. Furthermore, Friday’s release of US ISM manufacturing may weigh on the dollar, as the indicator is forecasted to reflect contraction in the sector for the second month in a row. However, non-farm payrolls will be released first at 8:30 EST, which could stoke volatility in EUR/USD, though the indicator hasn’t been as market-moving over the past few months as it has been previously. As a result, traders should keep an eye on key technical levels.

Equities – Dow Jones Industrial Average

Equity traders got what they wanted from the Federal Reserve, but apparently, they still aren’t satisfied as a markedly bearish tone in the Dow Jones Industrial Average remains. Indeed, the index has not been able to make a solid break above 12,500, even with a 50bp rate cut on Wednesday and a policy statement that left the door open to additional easing. Meanwhile, economic data in the US is expected to get worse, as ISM manufacturing is forecasted to remain below the critical 50 boom/bust level, suggesting conditions in the sector are deteriorating. The news may only boost speculation that the US is in or nearing a recession, and could weigh heavily on US equities. However, it is worth noting the non-farm payrolls will be released at 8:30 EST on Friday, which could play a role in price action as well if the figure is particularly surprising. It is also worth noting that while this tends to be a market-moving indicator, it hasn’t had as much of an impact in recent months, and traders should keep an eye on broad risk aversion trends.
Terri Belkas is a Currency Strategist at FXCM.