- The US ISM Manufacturing PMI is expected to have risen modestly in February.
- Market players will also pay attention to the ISM Prices Paid Index and the Employment Index.
- EUR/USD trapped between Fibonacci levels, as PCE inflation did not move the bar.
The Institute for Supply Management(ISM) will publish the February United States (US) Manufacturing Purchasing Managers’ Index (PMI) on Friday, the first business day of March. The report is considered a reliable indicator of the US manufacturing sector’s health, and the direction of the overall economy. The figures are expressed in percentages, with anything above 50.0 indicating expansion and readings below reflecting business contraction.
The US February Manufacturing PMI is foreseen at 49.5, improving from the December reading of 49.1 but still falling short of the desired threshold. According to the official release, “the manufacturing sector contracted in January for the 15th consecutive month following one month of “unchanged” status (a PMI reading of 50) and 28 months of growth prior to that.”
What to expect from the ISM manufacturing PMI report?
Back in January, the ISM Manufacturing PMI was pretty encouraging, as responders to the survey noted an increase in sales and more stable costs. Still, many noted a slowdown in new orders and continuously slow demand.
The ISM Manufacturing PMI is divided into several subcomponents, some of which are closely watched by speculative interest. In January, the New Orders Index moved into expansion territory at 52.5, somehow suggesting an improving demand outlook. At the same time, the Prices Index registered 52.9, up 7.7 percentage points compared to the December reading. The Price Index gauges the price change that US manufacturers pay for their inputs, and such an advance signaled heating price pressures. Finally, the Employment Index registered 47.1, down from December’s figure of 47.5.
Generally speaking, a headline reading above 50.0 should indicate above-expectations expansion and financial markets should welcome the positive news. As a result, high-yielding assets such as stocks may run higher, while the US Dollar may come under selling pressure amid risk appetite. Investors will also welcome signs of further expansion, such as an increase in the New Orders sub-component and easing price pressures.
Regarding inflation, the US released the January Core Personal Consumption Expenditures (PCE) Price Index. The Bureau of Economic Analysis (BEA) reported the Federal Reserve’s (Fed) favorite inflation gauge on Thursday, with the figures meeting market expectations. The Core PCE Price Index increased 0.4% MoM, doubling the previous 0.2% advance, while the annual rate printed at 2.8% easing from 2.9% in December.
In line with expectations data barely moved the bar. Market participants continue to bet on a Fed’s rate cut in June, with the odds for a 25 basis points (bps) cut standing at around 52%, unchanged from pre-release levels.
When will the ISM Manufacturing Purchasing Managers’ Index report be released, and how could it affect EUR/USD?
The ISM Manufacturing PMI report is scheduled for release at 15:00 GMT on Friday. Ahead of the data release, the US Dollar struggles to regain its footing. The EUR/USD pair fell pretty much straight ever since hitting 1.1139 by the end of December, bottoming mid-February at 1.0694.
Valeria Bednarik, FXStreet Chief Analyst, notes: “Measuring the December/February slump, the 38.2% Fibonacci retracement comes at 1.0865, where sellers rejected advances in the last few days. So far, buyers defended the downside at around the 23.6% retracement of the same slide at 1.0799, with EUR/USD trading mid-way between Fibonacci levels. The pair would need to break any of those extremes to become more attractive to speculative interest.”
Bednarik adds, “The ongoing advance seems a mere correction, and even if the pair manages to extend gains beyond the 1.0860 area, EUR/USD would need to break through 1.0970, the 61.8% retracement, to confirm a sustainable recovery. EUR self–weakness, however, plays against the bullish case. To the downside, the 1.0800 area is indeed providing support, with a break below it opening the door to a retest of the monthly low. In the meantime, the pair will likely extend its consolidative phase ahead of a directional catalyst that could affect the market’s perspective about upcoming Fed moves.”
Economic Indicator
United States ISM Manufacturing PMI
The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The indicator is obtained from a survey of manufacturing supply executives based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that factory activity is generally declining, which is seen as bearish for USD.
The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) provides a reliable outlook on the state of the US manufacturing sector. A reading above 50 suggests that the business activity expanded during the survey period and vice versa. PMIs are considered to be leading indicators and could signal a shift in the economic cycle. Stronger-than-expected prints usually have a positive impact on the USD. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are watched closely as they shine a light on the labour market and inflation.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
