ISM Manufacturing PMI Preview: US factory sector set to extend contraction into September

• The US ISM Manufacturing PMI is foreseen at 47.7 in September, improving further after June’s bottom.
• ISM Prices Paid Index and Employment Index could give hints about the Federal Reserve’s next steps.
• The risk for a EUR/USD corrective advance increased as the pair has fallen for 11 weeks in a row.

The Institute for Supply Management (ISM) will publish the United States September Manufacturing Purchasing Managers’ Index (PMI) on Monday, October 2. The index is expected to have ticked modestly higher to 47.7 from its previous monthly reading of 47.6. The official Manufacturing PMI has been within contraction levels ever since falling to 49 in November 2022 and slowly moving away from the multi-year low posted last June at 46.

What to expect from the ISM manufacturing PMI report?

Beyond the modest uptick in the headline figure, market players anticipate an improvement in all sub-components. The Employment Index is foreseen at 49 from 48.5 in August, while New Orders are expected to print 47 after posting 46.8 in August. Finally, the ISM Manufacturing Prices is anticipated at 48.9 in September, up 0.5 percentage points from the former reading.

Back in August, the report indicated a ninth month of contraction after a 30-month period of expansion. More relevant, the Prices Index registered 48.4, up 5.8 percentage points compared to the July figure of 42.6. Inflation in the United States (US), as measured by the Consumer Price Index (CPI), rose by more than anticipated in August, while the core Personal Consumption Expenditures (PCE) Price Index – the Federal Reserve (Fed) favorite inflation figure –, met expectations while easing from July,  up 3.9% YoY in the same month. 

A higher-than-anticipated ISM Manufacturing PMI Price Index sub-component, which gauges the price change that US manufacturers pay for its inputs, would hint at persistently high inflation extending into September. That should fuel speculation about at least one more rate hike in the US and support the central banks’ idea of “higher for longer” rates. As a result, the risk of an economic setback should increase, and the US Dollar benefits from a continued run to safety.

Investors will also pay attention to the employment-related sub-component ahead of the Nonfarm Payrolls (NFP) report scheduled for Friday. The tight US labor market is a critical factor when it comes to monetary policy decisions, as it allows the central bank to maintain the restrictive policy. Policymakers see modest signs of loosening labor market conditions, not enough, however, to change the course of monetary policy.

Offering a sneak peek into the US data, analysts at BBH noted: “ISM PMIs will also be important.  Manufacturing PMI will be reported Monday and the headline is expected at 47.9 vs. 47.6 in August. Keep an eye on employment and prices paid, which stood at 48.5 and 48.4 in August, respectively.”

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 14:00 GMT on October 2. Ahead of the data, the US Dollar trades near fresh multi-month highs against most major rivals, backed by mounting risk aversion and signs of a resilient American economy.

An upbeat headline should confirm the economy remains strong enough and that the country may dodge a recession. Such speculation should lift the mood and put pressure on the US Dollar, at least in the near term.

Strong inflation and employment sub-components, however, may spur speculation for tighter for longer Fed policy and boost USD demand amid renewed fears.

From a technical perspective, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes that “EUR/USD is struggling below the 1.0600 threshold on its road to recovery, as 14-day Relative Strength Index (RSI) indicator continue to sit beneath the 50 level.”

“Any recovery will gather steam on a sustained move above the 1.0650 psychological level, above which the 1.0700 round figure will be on the Euro’s radar. Meanwhile, powerful support aligns near 1.0490, below which a fresh downside will open up toward the 1.0400 mark.”