ISM Manufacturing PMI Preview: How worried are businesses? 3 scenarios for the potentially contrarian USD reaction

The ISM Manufacturing Purchasing Managers' Index for March is published on Monday, April 1st, at 14:00.

The indicator is a survey of businesses that ask them about the current situation and prospects looking forward. There is a significant correlation between the data and growth in the sector. The figure is a useful measure of the manufacturing sector and also serves as a hint towards Friday's Non-Farm Payrolls report for March.

When the PMI dropped sharply in December, it took markets with it. The recovery in January, alongside the improvement in financial markets, had analysts see December as a one-off. However, back in February, it dropped back to 54.2 points. The figure implies OK but unimpressive growth. Any score above 50 represents the expansion and below 50 represents contraction. 

The expectation for March is similar: 54.5 points. Before moving to the scenarios, it is important to remember that the Retail Sales report for February is published 90 minutes ahead of this release. The timetable is not the normal one. The consumption data has been delayed due to the government shutdown. See the Retail Sales preview.

3 scenarios

1) Within expectations: A score between 54 and 55 is likely to trigger some choppy movement, but no significant trends. The USD will likely extend the trend seen in the retail sales report.

2) Below expectations: Given the recent yield curve inversion and fears about an upcoming recession, the number may be lower. A score below 54 and especially a shocking drop under 50 (quite unlikely) will be very disappointing and show that businesses are fearful. In this case, the damp mood in markets may work in favor of the USD, a safe-haven asset. The greenback is unlikely to gain against the yen, the ultimate haven, but has room to rise against the rest.

3) Above expectations: A significant recovery in the ISM Manufacturing PMI above 55 points would already point to robust growth. It would revive hopes that the US could pull the whole world forward. Such an outcome could be beneficial for stocks, and risk assets, therefore adverse for the US Dollar. The greenback will have room for gains only against the yen.