The Institute for Supply Management is expected to report that their survey of conditions in the manufacturing sector fell to a nearly five-year low of 47.5 in March from 48.3. However, data from the Philadelphia, Richmond, and Chicago Federal Reserve regions all showed a mild improvement during the month. Looking a bit closer at the reports, the Philly and Chicago Fed indexes remained very much in contractionary territory, while the Richmond Fed index edged up to a six-month high.

April 1 US ISM Manufacturing (MAR) (14:00 GMT; 10:00 EST)
Expected: 47.5
Previous: 48.3

What Are The Markets Facing?

The Institute for Supply Management is expected to report that their survey of conditions in the manufacturing sector fell to a nearly five-year low of 47.5 in March from 48.3. However, data from the Philadelphia, Richmond, and Chicago Federal Reserve regions all showed a mild improvement during the month. Looking a bit closer at the reports, the Philly and Chicago Fed indexes remained very much in contractionary territory, while the Richmond Fed index edged up to a six-month high. That said, these are all very volatile reports, but given broadly weak domestic demand in the US, the risks are tilted to the downside for the ISM manufacturing release. Meanwhile, the employment component will also be watched carefully as a gauge for Friday’s Non-farm Payroll report. NFPs are expected to fall negative for the third consecutive month, which would significantly raise expectations for another sharp rate cut by the Federal Reserve at the end of April. Currently, futures are fully pricing in a 25bp cut to 2.00 percent at the end of April, while increasingly leaning towards a 50bp cut. If we see that the manufacturing sector report on Tuesday and other data, including NFPs, add to the pile of evidence pointing toward a US recession, futures markets may shift quickly to fully price in a 50bp cut to the fed funds rates on April 30.

Bonds – 10-Year Treasury Note Futures

Treasuries broke higher from a very short-term range on Monday, but have run into resistance at the 119-12 level. Nevertheless, the contract continues to look bullish and may target 119-24 next. Upcoming economic data may support the case for additional Treasury gains as ISM Manufacturing is expected to remain below the 50 boom/bust level for the second consecutive month. On the other hand, if the manufacturing sector report proves to be optimistic or if the equity markets see strong gains – indicating that traders are feeling a bit more risk-seeking – Treasuries could ease back toward support at 117-25.

FX – EUR/USD

The EUR/USD pair has been quick to return to trading near record highs, though the 1.5850/1.5900 level has provided formidable resistance. According to COT positioning, the euro may be forming a near-term top given the spike in the 13 week index from 33 to overbought levels near 80. However, the 52 week index remains low at 24, suggesting that the larger bullish trend could continue. As a result, it appears that we may see a consolidation over the next few weeks, similar to what we saw between November 2007 and January 2008.

This week is filled with event risk for the EUR/USD pair – due primarily to US releases – and ISM Manufacturing will get the ball rolling. The index is anticipated to fall lower, indicating contractionary conditions in the manufacturing sector for the second consecutive month. If the reading is in line with expectations, the news could weigh on the US dollar in the short-term, but the price action may not continue through during the rest of the day. On the other hand, a surprisingly strong ISM report – particularly above the 50 boom/bust level – could send the EUR/USD tumbling towards support at 1.5686.

Equities – Dow Jones Industrial Average

The decline in the Dow Jones Industrial Average has run into support at the 50% fib of the rally from 11,731 – 12,622 at 12,177. However, the 50 SMA at 12,306 has provided near-term resistance and has prevented any solid comeback for the index. Looking ahead, we could continue to see some stabilization near these levels, though the overall trend and bias for the DJIA remains very much to the downside. If Tuesday’s ISM Manufacturing data proves to be disappointing, this could weigh on US equities as the news would only add to evidence pointing toward a US recession.

Terri Belkas is a Currency Strategist at FXCM.