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The market may start the first trading session of the final quarter of the year on a positive note today. But sustaining the favorable open would depend on how the manufacturing ISM survey for September pans out.

This key gauge of the nation’s manufacturing sector has been in contractionary territory in recent months, raising doubts about the health of the thus-far robust industrial sector. But the manufacturing softness shouldn’t come as a surprise to anyone given the almost synchronized worldwide slowdown, reconfirmed by the September PMI surveys for China, the Euro-zone, and other regions of the world.

China’s official manufacturing PMI reading for September came in at 49.8, above August’s 49.2 level, but below the expected 50.2 reading. The competing private-sector measure of the same put together by the HSBC Bank (HBC) also showed a modest improvement from the August level, but still showed an under-50 reading. We saw a similar trend play out in the Euro-zone region this morning, where the September PMI reading  edged up a bit from the prior month’s level but stayed in contractionary territory for the 14th month in a row.

The U.S. economy is admittedly less trade dependent than some of the more export-centric economies like China and Germany. But export growth was a standout factor in this economic recovery and that prop may no longer be available going forward given the emerging decelerating trend in global trade volumes.

The World Trade Organization is projecting that global goods trading volumes will grow at roughly half the rate of the preceding year’s 5% pace, which itself was down from 14% growth in 2010. The recent soft freight outlook from FedEx (FDX - Free Report) was confirmation of this key emerging  trend.

We will get more clarity on this soft international backdrop in the coming days as the third quarter reporting season gets underway. Expectations are for earnings to decline in the quarter, but ramp up strongly in the fourth quarter and beyond. My sense is that these fourth quarter growth expectations will get a reality check as management teams provide more visibility about business outlook.

The market made strong gains in recent months in the run-up to the Fed’s latest easing program. But can it sustain those gains in the face of a deteriorating earnings picture, particularly with QE3 now in the rearview mirror?


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