ISM Manufacturing PMI Preview: Elevated investment set to boost index, US Dollar

Third time's a charm? The ISM Manufacturing Purchasers' Index (PMI) surprised investors in August and September, and there is room for a third beat. Sandwiched between ADP's jobs report and the countdown toward the Fed means a short-lived reaction. That provides an opportunity.

Here is a preview for the US ISM Manufacturing PMI, due on Wednesday at 14:00 GMT.

ISM Manufacturing PMI's importance

The long-running survey of purchasing managers in the industrial sector provides insights on intentions toward future spending, hiring, inflation and growth. The release also serves as a leading indicator toward Friday's Nonfarm Payrolls report. 

In the past couple of years, ISM's data was also watched for indications about inflation. As price rises dropped alongside economic activity, the headline became important once again. It is easier to focus on the overall figure when none of its components stands out.

The ISM Manufacturing PMI beat estimates in the past two months, but remains below 50 – the threshold separating expansion and contraction. 

ISM Manufacturing Index. Source: FXStreet

Is this a temporary correction in the downtrend? That theory is backed by higher interest rates and a global slowdown, which drag the index down, making the past two reads an anomaly. 

On the other hand, the rise in the index has a strong backer – Uncle Sam. The US government has been incentivizing investment in manufacturing, primarily related to clean energy, but also due to security reasons. 

Spending on manufacturing construction, a precursor to output, has surged in the past two years. A small drop in June was followed by fresh spending at historical highs. 

Total Construction Spending in Manufacturing. Source: St. Louis Fed

ISM Manufacturing PMI and the US Dollar

These figures, alongside some stability in China, could lift the ISM Manufacturing PMI. Economists expect a repeat of 49 points, so any improvement would be a surprise. An increase beyond 50, indicating fresh expansion in the sector, would be even better news.

In case the ISM Manufacturing PMI beats for a third time in a row, the US Dollar would rise. However, it is essential to note that the data is released less than two hours after ADP's labor market report is out – another high-tier economic indicator. In case ADP and ISM go in different directions, they would offset each other. 

More importantly, ISM releases its Manufacturing PMI four hours ahead of the Federal Reserve's decision. High tensions are set to hold back traders. Any spike – whether to the upside as I expect, or the downside – would likely be short-lived, and followed by a reveal. That implies an opportunity to jump against the initial reaction.

Final thoughts

While the ISM Manufacturing PMI is a significant market mover, the impact may be limited. Fed speculation is set to regain dominance shortly after the release.