What Are The Markets Facing?

The Institute for Supply Management is expected to report at 10:00 EDT that their survey of conditions in the manufacturing sector held below 50 – signaling contraction – for the fifth consecutive month at 49.0. In fact, data from the New York, Philadelphia, Chicago and Richmond Federal Reserve regions all showed a continued deterioration during the survey period. 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. The employment component will also be watched carefully as a gauge for Thursday’s Non-farm Payroll report. NFPs are expected to fall negative for the sixth consecutive month, which would normally raise expectations for rate cuts by the Federal Reserve. However, with the FOMC actually expected to raise interest rates by September, futures may simply move to price in no change in policy. 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 1.0 percent gain in Q1 GDP, the economy is in or nearing recession.

Bonds – 10-Year Treasury Note Futures

Treasuries have bounced quite a bit from support at 112-00, and a bout of risk aversion market-wide has ed the contract to climb higher in recent days. Looking ahead to Tuesday, ISM Manufacturing is expected to slip lower and hold below 50 – signaling contracting – for the fifth consecutive month. If the index falls in line with or more than forecasts, the contract could climb toward the 200 SMA at 114-14, with additional resistance from falling trendline looming above at 115-21. On the other hand, a stronger-than-expected reading could weigh Treasuries down below 114.

FX – EUR/USD

From a long-term perspective, EUR/USD continues to trade within a wide range of 1.5350 – 1.5800, as the US dollar consolidates across the majors. However, the pair remains very much within an uptrend, as EUR/USD bounced from trendline and 100 SMA support just a few weeks ago. Looking ahead to Tuesday, ISM Manufacturing is anticipated to slip lower and remain below 50, signaling contraction in the sector for the fifth consecutive month. As a result, EUR/USD could edge higher for a test of 1.5780/5800. On the other hand, a surprisingly strong reading could send the pair tumbling toward 1.5700/20, though sharper declines could take aim on 1.5630/50.

Equities – Dow Jones Industrial Average

Equities market experienced a mixed session on Monday as the DJIA held up above near-term support at 11,300. However, financial stocks continue to weigh on the markets as credit concerns and fears of additional multi-billion dollar write-downs persist. Looking ahead, the release of ISM Manufacturing could weigh the DJIA for additional tests of 11,300, as the index us expected to signal contraction for the fifth consecutive month. However, a better than expected release could help equities gain traction to target near-term resistance at 11,500.

Terri Belkas is a Currency Strategist at FXCM.