The Institute for Supply Management (ISM) is scheduled to release the December Manufacturing Purchasing Managers’ Index (PMI) on Monday. The index is a trusted measure of the health of the United States (US) manufacturing sector, closely followed by market players. It is based on a survey conducted by ISM among companies around the US, and the index revolves around the 50 threshold. A reading above the level indicates an expanding manufacturing sector, while a reading below it indicates contraction.
The December ISM Manufacturing PMI is forecast at 48.3, slightly better than the 48.2 posted in November.
What to expect from the ISM manufacturing PMI report?
The November ISM report showed that economic activity in the manufacturing sector remained in contraction territory for the ninth consecutive month, following a two-month expansion that was preceded by twenty-six straight months of contraction. The index declined to 48.2 from 48.7 in October. Key drivers behind the slide were declines in new orders and employment, although production recovered into expansion territory.
The New Orders Index contracted for a third straight month to 47.4, lower than the 49.4 recorded in October. The Production Index in the same period improved to 51.4 from the previous 48.2. Also, the Prices Index remained in expansion, registering 58.5, up from the previous reading of 58, while the Employment Index came in at 44, down from October’s figure of 46.
“The manufacturing sector continues to be weighed down by the unpredictable tariffs landscape,” said Stephen Stanley, chief US economist at Santander U.S. Capital Markets.
Market participants will pay close attention to the employment-related sub-index ahead of the Nonfarm Payrolls (NFP) report, scheduled for release on Friday. The labor market is likely to be at the top of investors’ priorities this week, given its influence on the Federal Reserve’s (Fed) monetary policy decisions.
The headline reading will also be relevant and likely trigger the initial market reaction. A better-than-anticipated outcome, with a reading above the 50 threshold, should boost demand for the US Dollar (USD), as it would both signal economic progress and diminish the odds of upcoming interest rate cuts. The opposite scenario is also valid, with a discouraging result putting pressure on the Greenback and boosting bets for a March interest rate cut.
When will the ISM Manufacturing PMI report be released and how could it affect EUR/USD?
The ISM Manufacturing PMI report is scheduled for release at 15:00 GMT on Monday. As investors slowly return to their desks from the winter holiday season, the EUR/USD pair maintains its near-term negative tone but holds above the 1.1700 mark. Geopolitical tensions and limited volumes have supported the US Dollar (USD) in the past few days, but not enough to change its bearish bias.
Valeria Bednarik, FXStreet Chief Analyst, notes: “The EUR/USD pair closed November and December in the red, extending its decline in early January. The pair has found near-term buyers around the 1.1700 level, but can pierce it on an upbeat outcome. The ISM Manufacturing PMI, however, needs to print above 50 to provide sustained support for the USD. A slide below the 1.1680 price zone would likely trigger stops and exacerbate the slide, with EUR/USD likely to near the 1.1600 threshold before finding more solid buying interest.”
Bednarik adds: “If the ISM Manufacturing PMI comes below expected and even below the November reading, the USD is likely to edge sharply lower across the FX board. The January 2 high at 1.1765 is the immediate resistance level ahead of the 1.1800 mark. Additional gains could see the pair rallying towards the 1.1860 price zone.”
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Economic Indicator
ISM Services Employment Index
The ISM Non-Manufacturing PMI released by the Institute for Supply Management (ISM) shows business conditions in the US non-manufacturing sector, taking into account expectations for future production, new orders, inventories, employment and deliveries. It is a significant indicator of the overall economic condition in the US. The ISM Services Employment Index represents business sentiment regarding labor market conditions and is considered a strong Non-Farm Payrolls leading indicator. A result above 50 is positive (or bullish) for the USD.