ISM Manufacturing PMI Preview:

US ISM Manufacturing PMI is expected to indicate slower growth in June. The inflation component is critical and low expectations may lead to an upside surprise.

The US ISM Manufacturing Purchasing Managers’ Index (PMI) provides an understanding of the jobs-related data. PMI reading on Friday, July 1, is expected to focus on inflation; the other mandate of the Federal Reserve, and currently the overriding priority.

The headline Manufacturing PMI is expected to decline from 56.1 point in May to 55 in June, reflecting slower growth and lower expectations from businesses in the industrial sector. Nevertheless, any score above 50 still represents expansion. The dollar would react negatively to the headline only if it tumbles below that 50-point threshold.

The more important data point is Prices Paid, which is a snapshot of purchasing managers’ inflation expectations. The economic calendar is pointing to a slide from 82.2 to 80.5 points. However, with rising prices being on everybody’s minds, TVs and gas stations serving as billboards, there is room for an upside swing rather than a downside one.

Moreover, the most recent Consumer Confidence survey by the Conference Board showed an uptick in one-year inflation expectations, from 7.5% to 8%. Perhaps the most convincing argument traders have for the upside is found by examining recent publications.

It seems that economists adapt themselves to recent surprises, either expecting a high Prices Paid figure when the data is elevated in the previous month, or projecting a weak number after a miss.

This time, a relatively softer figure is on the cards, but economists might have exaggerated expectations to the downside.