US Manufacturing Stalled, Aussie GDP Up Next

A soft ISM manufacturing reading highlighted the challenges in the US economy on Tuesday but the US dollar was resilient on inflation worries. The US and Canadian dollars were the top performers while NZD lagged. The market will focus on Australian GDP later. Both longs in silver and EURUSD hit all targets, & so did long US crude, while USDJPY, CADJPY and AUDUSD remain in progress and short gold was stopped out.

The ISM manufacturing index fell to 49.6 vs 50.0 expected. It was the worst reading since 2009 and showed contraction for the third consecutive months. Metrics on new orders, employment and order backlogs point to continuing weakness.

Another surprise from the report was prices paid, which surged to 54.0 from 39.5 on rising raw materials costs. Commodity-price inflation is a critical factor in the QE3 equation and signs of rising pipeline inflation will keep the Fed sidelined.

The US dollar initially weakened after the report but the inflation concerns stopped the move with EUR/USD remaining above 1.2550. Overall market moves were small but the antipodeans continued lower on concerns about China.

At 0130 GMT, Australian releases second quarter GDP data. The consensus estimate is for a healthy 0.7% quarterly growth but a deceleration from 1.3% in Q1.

An hour later, the Chinese services PMI from HSBC will be released. This is the least-important Chinese PMI but a fall from 53.1 prior reading could add to worries about a significant slowdown.

Another risk on the calendar is the Quebec provincial election. The separatist PQ party is leading in the pools and a win may spark fears of a Canadian breakup. We see that as an extremely low probability event and expect CAD to quickly rebound from any selling. Polling results will begin to be released after 0030 GMT.

Ashraf's piece on the ISM, QE3 & the Fed

http://www.cityindex.co.uk/market-analysis/market-news/57152012/prices-stand-in-the-way-of-qe3/

-AB