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Those who have argued that the United States can withstand the weakness hitting global factories just received a shock: the American manufacturing sector shrank last month, according to the Institute for Supply Management. It’s the first time that’s happened since August 2016.

Against expectations, the group’s manufacturing index, a key gauge for the industry, came in at 49.1 as the trade war hit sentiment. Any number below 50 indicates a contraction.

So what happens now? Societe Generale strategist Kit Juckes points out that this is the third time that the US manufacturing ISM has dropped below 50 since the financial crisis, and the previous two events did not trigger recessions. But it’s definitely not a positive signal.

In the near term, the survey’s biggest impact has been to increase expectations for a larger interest rate cut by the Federal Reserve later this month. The odds of a 50-basis point cut are now at more than 9%, up from 0% on Tuesday, according to CME Group’s FedWatch tool.

But we’ll get a much better picture of what the Fed is working with by the end of the week. The Institute for Supply Management’s non-manufacturing index arrives Thursday. That’s followed, of course, by a blockbuster August jobs report on Friday.

Investor insight: It’s important to stay focused on manufacturing, especially given the international backdrop. The current downturn in global manufacturing extended to its fourth month in August, according to JPMorgan’s Global Manufacturing PMI, based on surveys with thousands of executives in over 40 countries.

But manufacturing drives about 11% of US economic output. Should it become clear that the factory slowdown is bleeding over into the services sector, that would pack a bigger punch — especially because of what it would mean for jobs. Watch this space.

Hong Kong stocks soar

The Hang Seng (HSI) just had its best day of the year on hopes that protests in the city could fade.

Happening now: Hong Kong leader Carrie Lam announced the complete withdrawal of an extradition bill that had sparked months of pro-democracy protests in the city’s streets. The news pushed up Hong Kong’s main stock index by 3.9% on Wednesday, according to my CNN Business colleague Laura He.

The impact, per Laura: “Nearly every component of the Hang Seng was up [on the news]. The biggest gainers were all property developers, which have been battered by protests and the ongoing US-China trade war.”

Big picture: Last month, the Hang Seng recorded a 7.4% drop, one of the worst among major indexes. The protests have created a perilous environment for companies doing business in Asia’s premier financial hub. Any sign that tensions could ease should encourage investors.

Boris Johnson’s loss is the pound’s gain

The pound is getting whipsawed by political turmoil in Britain. Brace for more volatility as the parliamentary drama continues to unfold.

The currency jumped 0.9% against the dollar on Wednesday, rising to nearly $1.22 after UK Prime Minister Boris Johnson suffered a parliamentary revolt aimed at preventing Britain from crashing out of the European Union without a deal to protect the economy. Those gains reverse steep declines from earlier this week, when the pound fell to its lowest level since a surprise flash crash in October 2016.

On the radar: Investors are now looking toward the prospect of an election, which could theoretically be called before or after the October 31 Brexit deadline.

Some investors worry that an election would only amp up the chaos. The outcome could embolden Johnson to pursue his hardline approach to Brexit. Or, it could elevate Labour leader Jeremy Corbyn, whose leftist policies could hit asset prices, the thinking goes.

Deutsche Bank strategist Oliver Harvey disagrees. He says an election is the “least worst of all scenarios this week” and believes it would reduce the prospect of no deal Brexit. Harvey says he’d upgrade his view on sterling to neutral if an October election is called.

Key takeaway: Labour policies would be temporary, reversible and most likely moderated by Parliament, as opposed to the “permanent shock caused by a no deal Brexit,” per Harvey.

Up next

American Eagle Outfitters (AEO) reports earnings before US markets open. Slack (WORK) will follow after the close.

Also today:

  • US balance of trade data for July arrives at 8:30 a.m. ET.
  • The Bank of Canada will issue its latest interest rate decision at 10 a.m. ET.

Coming tomorrow: Time for the Institute of Supply Management’s Non-Manufacturing Index. Keep an eye on this one.