ISM Manufacturing (JUN) (14:00 GMT; 10:00 EST)
Expected: 55.0
Previous: 55.0

ISM Manufacturing - Prices (JUN) (14:00 GMT; 10:00 EST)
Expected: 69.0
Previous: 71.0

How Will The Markets React?

Next week, the US economic calendar will be exceptionally busy and US manufacturing ISM is the first of many key pieces of data due for release. Regional indexes have been strong. Both the Empire State and Philadelphia Fed surveys jumped in the month of June. The Empire State survey reached a 1 year high while the Philly Fed survey hit the highest level since March 2006. Even though Chicago PMI fell in the month of June, it still remains above 60, which is well into expansionary territory. Overall, the regional indexes suggest that the national index will be strong but when it comes to the ISM, there is always more than meets the eye. With US growth and inflation being the market’s top focus, the employment and prices paid components will be closely scrutinized. The employment component is a leading indicator for non-farm payrolls while prices paid will shed some light on how concerned the Federal Reserve should be about inflation. The prices paid component of the regional indices all dropped, so even if the headline number increases, the reaction in the US dollar could be tempered by any downward surprises in the inflation component. Going into the number, the bond and currency markets are not expecting a stronger release. Yields are down sharply while the dollar has sold off. The rebound in the stock market entails a bit optimism, but overall the financial markets are not expecting a strong number. Having already sold off significantly, bonds will probably see a limited reaction to a weak number. The bigger move will be in the EUR/USD and the stock market. In the event that the headline does overshadow prices paid, then we could see a bigger move in yields, stocks and USD/JPY, which has the advantage of carry.

Bonds – 10-Year Treasury Note Futures

Over the past 24 hours, 10 year Treasury prices have increased sharply. 105-20 is near term support for the 10-year Treasury note futures while 105-25+ is resistance. The rise in prices and fall in yields was triggered by weaker US personal income and personal spending data as well as month / quarter end flows. Prices have been increasing since the middle of June but still remain well below May levels. This indicates that the move in bonds is most likely a retracement of prior weakness than a clear shift in sentiment going into the ISM release. Either way, the bond market is not expecting a strong ISM number, so the bigger reaction will most likely be to a stronger rather than weaker report.



FX – EUR/USD

As for the currency market, manufacturing ISM is an important release and there is no better way to trade the data than through the majors. The breakout in the EUR/USD today indicates that the currency market is also not looking for a stronger number. Support is right at the breakout point of 1.3470. The importance of this support level is exacerbated by the fact that the 50-day SMA and the 50 percent Fibonacci retracement of the 1.3682-1.3262 sell-off also rests at the same level. Therefore from a technical perspective, there is a good chance that we might have a softer number and even if we have a stronger number, the “fall” in the EUR/USD may be limited to 1.3470. Next week we also have the European Central Bank interest rate announcement. Although they are not expected to change rates, ECB President Trichet should remain hawkish. This is why weakness in the EUR/USD could be limited and why the currency pair could be a better trade for those anticipating a softer ISM number while USD/JPY may be the better buy for those anticipating a stronger number.



Equities – Dow Jones Industrial Average

There was an exceptional amount of volatility in the US stock markets today. The Dow went from being up over 50 points to down over 100 points before ending the day only slightly lower. This see-saw price action is indicative of quarter end position adjustments, but the volatility was exacerbated by the foiled bomb plots in London. The intraday chart of the Dow indicates that 13450 is near term resistance but on the daily charts 13565, the June 21 high is the key resistance level to watch. Ultimately the index is fluctuating within a 500 point trading range and for the time being, the low level of ADX suggests that there is nothing threatening the top or downside of this range. Yet, the sharp reversal in the Dow does diverge significantly with the rather “calmer” movements in the bond and currency markets. Therefore the question to ask is which market is more right since the rebound in stocks suggest that equity traders are not expecting a negative number. Typically, the bond and currency market is more accurate, but traders should not underestimate Friday’s move in stocks.



Terri Belkas is a Currency Analyst for FXCM.