ISM Manufacturing PMI Preview: US Dollar set to decline on further signs of slowdown

Soft landing – a scenario in which the economy cools down but continues growing moderately is the holy grail the central bank, economists, and investors all seek. It seems to be in sight, but every data point matters and shakes markets. 

Here is a preview of the ISM Manufacturing PMI, due on Friday at 13:30 GMT. 

For a change, Nonfarm Payrolls is released on the second Friday of the month, but the first day of December does feature a leading indicator – a snapshot of the industrial sector, the ISM Manufacturing Purchasing Managers’ Index. This forward-looking indicator has been below 50 in recent months, indicating contraction in the sector. 

Industrial optimism has been gradually declining: 

ISM Manufacturing PMI. Source: FXStreet

An industrial squeeze may lead to a recession, which is worrying for investors. However, the world's largest economy leans heavily toward the bigger services sector, which is growing. Moreover, the squeeze in manufacturing is only moderate, not severe.

Another reason to be relatively optimistic is massive investment in industrial construction, leading to potential output growth in 2024. 

Markets need things to remain that way – pointing to modest growth. Expectations stand at an increase from last month's disappointing 46.7 points to 47.6 this time. In the past ten months of 2023, the indicator fell short of estimates seven times – implying another miss this time.

ISM Manufacturing PMI. Source: FXStreet

Even if the data beats estimates but remains below 50, any bounce in the US Dollar will likely be followed by a retracement. Investors would not see it as a return to growth, but rather a change of course. Any knee-jerk reaction would serve as a potential scalping opportunity to go against the Greenback and in favor of stocks. 

The extreme scenarios would trigger larger and more meaningful trends to the other direction. A score above 50 would indicate that American manufacturers are bullish, and therefore, the path of interest rates could be higher, sending stocks down and the US Dollar up.

The other extreme is a depressing result below 43. That would fuel speculation of an upcoming recession, which would favor the Greenback as a safe haven, however – counterintuitive maybe, but it has happened many times before. It would also hurt stocks, as investors would fear company profits would suffer. 

Both extreme scenarios are highly unlikely. I see better chances of a small disappointment which would extend current trends, or a small beat, which would trigger a short-lived correction without a meaningful follow-through.