US manufacturing sector momentum decelerating – TDS

Research Team at TDS, expects that US manufacturing sector momentum should leak lower for the second consecutive month, with the headline ISM manufacturing index falling to 50.2 in May from 50.8.

Key Quotes

“The decline in the index is expected to be driven by weaker new orders activity (which should fall back to 52.4), while the production sub-index should also decline. The softening in manufacturing activity has been reflected in the regional Fed PMIs, with the Empire, Philly, and Richmond Fed indicators all falling sharply. A weak ISM manufacturing performance would also be consistent with the observed declines in the Chicago and Markit manufacturing indicators, both of which have generally been good predictors of the direction for the ISM.

Risks to the forecast

The risks to this forecast are tilted to the downside, with the performance of new orders standing out as the key wildcard. For some context, the new orders, unfilled orders and orders backlog sub-indices in the Philly, Empire and Richmond Fed reports all fell sharply. A similar performance in the ISM manufacturing could push the headline index back into contractionary territory.

Foreign Exchange

Given that a Fed hike over the summer is well priced, we think risk of a material data disappointment (i.e. sub-50 with soft details from new orders) will bear a greater impact on the USD than a positive surprise. We think the USD is particularly vulnerable to a temporary reprieve given the DXY has staged a solid rebound (~4.3%) from the May 3rd low but we emphasize that the dip may be shallow ahead of the payrolls report on Friday and Yellen’s June 6th speech.

We are watching EURUSD where we spot crucial resistance in the 1.1200/1.1220 area for EURUSD, a region that broadly coincides with the April lows and the congestion zone following the breakdown on May 18th. In the event of a very strong ISM report, we think 1.1080/1.1100 will be the key support zone as this coincides with trend channel support established from the December 3rd 2015 low.”