The widely watched ISM Manufacturing Index, the broad measure of monthly manufacturing activity in the United States, rose in June after showing contraction in May.

The report also hinted that manufacturing payrolls declined sharply in the month in a sign that Friday's employment report will show further weakness for the jobs picture.

Manufacturing Gains

In June, the ISM Manufacturing Index rose to 50.9 from 49.0 in May, beating expectations of 50.5. The leading indicator in the report, the New Orders sub-index, also rose sharply, rising to 51.9 from 48.8 in a sign that the future might be brighter for U.S. manufacturing.

Related: Eurozone Manufacturing Contracts Less Than Expected In June, Spain Improves

In addition, the current production index gained the most of the nine sub-indexes in June, rising to 53.4 from 48.6. This gain helped boost the overall reading and showed that the slump in May might have been a one off event as companies held up orders as interest rates rose sharply in the back half of the month. However, it seems that production continued strongly again in June.

Payrolls Drop

The employment sub-index in the ISM report was exceptionally bearish as the indicator fell into contraction territory (below 50) for the first time since September 2009. The employment indicator fell to 48.7 from 50.4 in May. The print is a signal that there is downside to Friday's Non-Farm Payroll report.

Manufacturing Payrolls, a component of the NFP report, were expected to remain flat from May into June in the latest consensus survey conducted Sunday. However, the weak manufacturing employment figure could mean downside to these figures and to the broad NFP report. Non-Farm Payrolls are expected to have expanded 165 thousand in June, below May's 175 thousand, with private payrolls rising 175 thousand, 10 thousand less than in May.

Markets React

S&P 500 futures rose to session highs in early trading, rising to a high of 1,620.00 before retreating to the current 1,617.75. Futures were up 1.22 percent on the session or nearly 20 index points. Meanwhile, tech-heavy NASDAQ futures rose 1.42 percent.

The Dollar Index retreated from session highs following the report as the reading sparked a risk-on sentiment that saw flows out of the dollar and into other currencies. The Dollar Index fell from a high of 83.235 to 83.124 as the euro, the pound, and the Canadian dollar gained while the yen and Swiss franc weakened, a clear risk-off move.