The Institute for Supply Management is expected to report that their survey of conditions in the manufacturing sector fell to a five-year low of 48.0 in April from 48.6. However, data from the Philadelphia, Richmond, and Chicago Federal Reserve regions all show that conditions remain weak. Looking a bit closer at the reports, the Philadelphia and Richmond Federal Reserve regions showed a major deterioration during the month, as the former hit the worst levels since February 2001 and remains very much in contractionary territory.

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 five-year low of 48.0 in April from 48.6. However, data from the Philadelphia, Richmond, and Chicago Federal Reserve regions all show that conditions remain weak. Looking a bit closer at the reports, the Philadelphia and Richmond Federal Reserve regions showed a major deterioration during the month, as the former hit the worst levels since February 2001 and remains very much in contractionary territory. Meanwhile, Chicago PMI proved to be slightly better than expected, as the index rose to 48.3 from 48.2 versus forecasts for a drop to 47.5. However, PMI held below the pivotal 50 mark for the third consecutive month, suggesting that business activity continues to contract. The employment component of ISM Manufacturing will also be watched carefully as a gauge for Friday’s Non-farm Payroll report. NFPs are expected to fall negative for the fourth consecutive month, which would normally raise expectations for additional rate cuts by the Federal Reserve. However, with the FOMC unlikely to cut rates much further the rest of the year, futures may not be quick to price in significant reductions based on negative US data. Nevertheless, if we see that the manufacturing sector report on Thursday and other data, including NFPs, prove to be disappointing, the markets may remain wary that despite the 0.6 percent gain in Q1 GDP, the economy is in or nearing recession.

Bonds – 10-Year Treasury Note Futures

Treasuries have managed to hold above support at the psychologically important 115-00 level, but given the hawkish, inflation-focused commentary from various Federal Reserve officials we’ve seen lately, it’s no wonder the bonds markets are moving in favor of no change in interest rates on April 30. The contract could see significant volatility this afternoon amidst the FOMC rate decision. However, the status of risk aversion may be the key factor to watch, as a sharp drop in the equity markets could lead Treasuries to rebound toward the 100 SMA at 116-15. Meanwhile, Thursday’s ISM manufacturing release may have only a limited impact, especially ahead of Friday’s Non-farm Payrolls report.

FX – EUR/USD

EUR/USD remains very heavy, and as we mentioned in the DailyFX FOMC preview, the “technical outlook for the EUR/USD pair reflects 5 waves down from 1.6018, confirming that an important top is in place.” However, the US dollar faces significant event risk this afternoon as the FOMC’s announcement could be pivotal, but a 25bp reduction may not be enough on its own to take the wind of the greenback’s recent rally. In fact, if the FOMC’s policy statement indicates a pronounced focus on inflation rather than credit conditions, the financial markets, or the economy, the US dollar could actually rally as traders rush to price the potential for a pause in further rate cuts for the rest of the year. Looking ahead to Thursday, the ISM manufacturing report may only play a role in EUR/USD price action if the figure deviates from expectations. A stronger-than-expected reading would weigh EUR/USD down toward support at 1.5420 (if the pair hasn’t fallen lower already), with the next major level of support looming at 1.5230. On the other hand, an extremely disappointing figure could allow EUR/USD to bounce, though the price action may only last for a very short time, especially ahead of Friday’s Non-farm Payrolls report.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average has retraced 50 percent of the drop from 14,198.10 to 11,634.82, as the index has made an intraday break above 12,916. Can the DJIA sustain the break to target the 200 SMA at 13,059? This afternoon’s FOMC decision is sure to spark additional volatility, and the news could determine whether US equities continue to trek higher for a bit long, or turn on a dime. As a result, Thursday’s ISM manufacturing figures may not play a big role in price action for the DJIA unless the news is very surprising. Nevertheless, traders should keep on eye on the release, as the index is expected to hold below the 50 boom/bust level for the third consecutive month and pointing toward a recession in the manufacturing sector.

Terri Belkas is a Currency Strategist at FXCM.