While we have begun this week with a heavy risk off environment - mainly based on the European financial sector and the latest developments in the euro zone sovereign debt crisis - for US equities and the fate of further Fed stimulus will rely on what the macro data from the US tells us.

Can Manufacturing Sector Rebound Heading into 4th Quarter

For the US, this week will feature 3 key manufacturing reports, including a look at both leading and coincident indicators for the sector. The three reports are the Empire manufacturing index, the Philadelphia Fed index, and industrial production - all coming out on Thursday.

The prognosis is mainly a downbeat one, as both the Empire and Philly fed index is are expected to continue to print negative figures.

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The Empire manufacturing index for September is expected to show a -3.9 reading their to -7.7 in August.

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The Philadelphia fed index expected to also show contraction for the month at -14.4 compared to -30.7 in August. This index has come under major pressure during the past few months, and while still negative, improvement would be welcome.

Now despite the weaker readings we saw in the Empire and Philly Fed indexes, the August ISM manufacturing index - the main measure of national manufacturing activity - still showed expansion for the month, which helped to ease some of the concerns around the US economy. Industrial production data for the month of August is expected to show a 0.1% increase compared to a 0.9% gain in July. So while output is expected to be positive the expectation is only for a small gain.

If the Empire and Philly Fed indexes disappoint, then the slowdown in the manufacturing sector which began with the March Japanese earthquake and supply-side disruptions, would have combined with weaker demand and slower global trade to take a bite out of what was an original spearhead of the recovery. Better than expected results would, on the other hand, help give some confidence for the sector as we head into the 4th quarter.

Retail Sales and Consumer Confidence To Give Insight Into Consumer Spending

Also this week we have a look at consumer spending patterns in the form of the retail sales report for the month of August. Consumer spending drives most of the US economy, and the Wednesday report, is expected to show a 0.2% increase for the month of August compared to 0.5% gain in July.

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Core retail sales - those that strip out auto sales - are also expected to climb 0.2%. Here too a disappointing figure would renew concerns about the US economy, considering the high unemployment rate and weak consumer confidence which makes consumers more prone to save rather than spend.

On the flipside a positive report here would lessen the need for more stimulus from the Federal Reserve and could help boost the US dollar, though at the same time it could help to inject some risk appetite into markets that have been battered by concerns from the euro zone.

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At the end of the week we will get our preliminary reading of the University of Michigan consumer sentiment for September. The index is expected to climb around one point to 56.6 from the final August reading of 55.7, but as we can see that would only be a small reprieve for an indicator that has fallen very sharply during the last 3 months.

Inflation Readings for August One Key to Determining FOMC's Next Move

Finally, we have a 3rd key set of releases - measures of inflation for consumers producers and imports. In regards to the Federal Reserve, it is key to them how inflation progresses from here for the question of whether to embark on another round of quantitative easing. If headline inflation, and underlying core inflation, continues to inch upward as it has been over the past 5-6 months that it makes it much harder for the Fed to undertake another round of bond buying.

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The CPI data, to be released on Thursday, is expected to show a 0.3% monthly increase in August compared to 0.5% rise in July. Core prices - which exclude food and energy - are expected to rise another 0.2% in August, matching the level in July.

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On the year headline CPI is expected to match July's figure of 3.6%. with the core annual rate expected to rise to 1.9% from 1.8%. If we surprise to the upside, that will add to the case of the current dissenters on the FOMC to not make monetary policy more accommodative.

Producer prices come out on Wednesday and here were expected see a monthly 0.1% drop for the headline rate with core PPI up 0.3%. That compares to headline increase of 0.2% in July and a core increase of 0.4%.

Summary:

While attention continues to remain on Europe fundamental data from the US this week will be important as well. We will get fresh data on manufacturing, consumer spending and confidence, and inflation. Bringing the three of these together should give us a clearer picture of the state of the US economy and how willing the Fed may be to undertake further steps when the FOMC meets next week.

Stronger-than-expected data from the US will have 2 main impacts. One will be a lessening of expectations of further quantitative easing; the other a calming influence on risk sentiment which could help boost risk appetite, which could actually be a bit of a USD negative considering the Dollar falls when investors are feeling more optimistic and seeking higher returns abroad.

Weaker than expected data from the US will instead increase the chances of more quantitative easing as well as increase investors anxiety and therefore the risk off environment. That hurts the USD from an interest rate perspective, but could boost the USD as it is a destination for safe haven flows.

Nick Nasad
Chief Market Analyst
FXTimes