width=244Release: ISM Manufacturing Index  (Nov)
Forecast: 51.6-52.0,
Previous: 50.8 (Oct)
Date/Time: 12/1/11 at 10:00AM ET (15:00 GMT)

Will ISM Manufacturing See A Bounce in November

The expectation for the ISM manufacturing index (PMI) is that the manufacturing sector increased its pace of expansion, with the headline index forecast to rise to 51.6-52.0 from Octobers 50.8.

Any level above 50 implies expansion in the sector while a reading below signifies contraction.

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As we can see from the chart to the right, the manufacturing sector had been performing very well in the 1st quarter of this year but then activity was knocked back as a result of the March earthquake/tsunami that disrupted manufacturing supply lines, we had an oil shock from the war in Libya, the deterioration of business and consumer confidence as a result of the debt ceiling debate and downgrade of the US credit rating, as well as the ongoing Euro-zone sovereign debt crisis that has flared up over the last few months.

The past 4 months the US manufacturing sector has continued to show positive, albeit, very slow growth.

Chicago PMI Better Than Expected, Can Act as Leading Indicator

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Just as today's ADP jobs report raises the prospects for a better-than-consensus gain in Friday's payroll report, today's Chicago ISM survey lifts the odds that Thursday's national ISM report could beat consensus forecast of 52.0.

Unlike closely watched Fed regional reports like the Empire State and Philly Fed surveys, the Chicago and US ISM reports give big weights to the auto industry, which has bounced back after supply problems related to Japanese disasters.

3 Main Scenarios - What To Expect - Implications:

Positive Scenario (Stronger Manufacturing Activity): In a positive scenario, one in which the manufacturing index climbs above 52.0, it would be another welcome sign that the US recovery was picking up pace in the 4th quarter. It would be a positive for equities and other risk assets and would tend to continue the risk-on theme we have seen this week. That would mean the AUD, CAD, and NZD, along with the GBP, may extend their gains against lower yielding safe haven currencies like the USD and JPY

Status Quo Scenario (Activity Pick Up, In Line with Expectations): A report that hits consensus forecasts will be a positive as it will mean manufacturing activity advanced. However they may be some doubts to see if the stronger data would be able to be sustained as we move into 2012. The recent pick up in momentum in the US may just be a lingering effect from the normal resumption of activities now that Japan is back to 100%. In other words it could just be post-Japan bounce. In any case, the euro-zone sovereign debt crisis and downward revisions to growth in Europe and the UK, as well as slowing growth in China, should weigh on the prospects of the US economy.

Still a reading that hits expectations should be marginally better for riskier assets, equities, and higher yielding currencies.

Negative Scenario (Activity Same, or Flat): In the negative scenario, one in which the ISM index undershoots forecasts of a gain, and even stumbles below October's reading of 50.8, it would undercut expectations that the US recovery is in fact gaining momentum and be a downward force on risk sentiment and higher yielding currencies.

Still, for both scenarios we will have to be cognizant of the Friday's NFP report as moves may be limited until that key risk event is out of the way.

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, AnalysisEducationVideosCharts, and other trading resources.