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US ISM: Index to linger in contractionary territory - TDS

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 1, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at TDS, suggests that the US manufacturing sector remains in the midst of a protracted recession, and January should mark the third consecutive sub-50 print on the headline ISM manufacturing sector indicator.

    Key Quotes

    “This will be the first instance of this since the economic recession ended in 2009. TD expects the headline index to decline to 48.0 in January from 48.2, reflecting a further weakening in manufacturing sector momentum. Production activity should decline further as US producers cut back on their output to reduce inventories.

    The key forward looking indicators are also expected to weaken further, with new orders backlog slipping. The new orders to inventory sub-index, a key gauge of future production, should also decline, pointing to a further decline in manufacturing sector activity in early 2016. The drop in the headline index is broadly in line with the wide array of weak regional PMIs, which have remained firmly in contractionary territory. As we move deeper into the year, with the headwinds from the strong dollar abate and the global recovery regaining its footing, we expect the US manufacturing sector to rebound.

    Risks to the forecast

    The risks to our call are fairly balanced. From the regional PMIs perspective, the sharp rebound in the Chicago PMI well above the 50 mark does provide a counterbalance to the other regional indicators which have all remained firmly in contractionary territory. The Markit manufacturing PMI also slipped, but remained in expansionary territory.

    Foreign Exchange

    With expectations already so low, we see an asymmetric risk around this report that leaves the USD more sensitive to a positive surprise. The cross to watch will be EURUSD, which would fall under further pressure following today’s decent data run (GDP, ECI and Chicago PMI). We do not see much in the way of support sub-1.08 but reckon that 1.0720 will be the first level to watch for support. In the event that the ISM disappoints, we see EURUSD gains capped to 1.0938.”
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