The Institute for Supply Management is expected to report that their survey of conditions in the manufacturing sector fell back to February’s five-year low of 48.0 in May from 48.6. However, data from the Philadelphia, Richmond, and New York Federal Reserve regions all show that conditions remain weak. Looking a bit closer at the reports, all three showed declines in new orders with Philadelphia and New York seeing shipments decline. This could signal a weaker than expected ISM reading, as new orders held steady last month as did the overall gauge. However, customer inventories fell over four points below its six month average last month. Therefore, customers may have looked to replenish their stock in order to meet the expected increase in consumer demand from the government’s fiscal stimulus plan. Also, smaller regions such as Ohio and Detroit have continued to experience expansion which could help offset declines in other areas. Recent GDP figures have confirmed that the first quarter saw increased demand from abroad on the back of the weak dollar. Traders will also focus on the employment component as they try and gleam insight into the upcoming NFP report, last month’s report component was the lowest in at least six months.

Bonds – 10-Year Treasury Note Futures

Treasuries have been in a steady decline as the likely hood of a Fed rate cut has diminished to 2% as Fed fund futures are pricing in a 98% chance that central bank will leave rates unchanged. Traders have also increased bets to 9% that the MPC will hike rates at the August meeting. Treasuries have found some support at the 200 Day SMA as a corrective bounce may be underway but the contract continues to look unattractive as inflation concerns mount. A significant drop in U.S. manufacturing may be enough to provide support as it will temper expectations for a rate increase. Conversely, a second consecutive surprise to the upside could send bonds significantly lower with very little technical support remaining.

FX – EUR/USD

EUR/USD recently broke below the 1.5500 price level for the first time since May 19th . The combination of dour European fundamental data and easing oil prices have brought back dollar bulls. The 38.2% Fibo level of the 1.444 -1.602 rally has been a strong level of support for the pair. The upcoming ISM manufacturing release may serve as event risk as there is no European data prior to the print. The expected slowdown in manufacturing may lower expectations for a Fed rate hike, currently Fed fund futures are pricing in a 9.0% chance of an increase at the August meeting and a 27.3% chance in September. Expectations have already started to diminish as the chances decreased from 13.5% in August and 33.6% in September since yesterday, as personal income and spending declined. However, if demand from abroad remains strong and the fiscal stimulus plan spurs domestic demand a rebound in manufacturing will fuel optimism for a rate increase and provide bullish dollar sentiment.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average has bounced off of support at the 50.0% Fibo level of the 11,731-13,132 rally. Easing oil prices have provided support for equities, but recent reports showing a slowing of personal income and spending may weigh on equities going forward. Although trader’s fears have eased regarding the credit crisis, focus has turned to its impact on the economy combined with the effects of rising inflation on consumer demand. A weakening of the manufacturing sector may weigh on stocks as anticipated demand from abroad is expected to bolster the sector. Most U.S. companies that reported strong earnings during last quarter saw significant increases from their international business. If this demand weakens, earnings may significantly disappoint going forward with the U.S. economy not expected to realize an improvement in growth for at least a few more quarters. However, a rebound in production will signal foreign demand remains strong and a U.S. rebound may not be that far away, leading to an appreciation in stocks.

Terri Belkas is a Currency Strategist at FXCM.