Will ISM Non-Manufacturing Signal A Rebound In Friday's NFP Report?

ISM Non-Manufacturing (SEP) (10:00 EST; 14:00 GMT)

Expected: 54.6

Previous: 55.8

How Will The Markets React?
Conditions in the US non-manufacturing sectors - which account for approximately 70 percent of total economic activity in the country and include retail, services, and finance - are anticipated to have deteriorated during September, as the Institute for Supply Management index is estimated to fall to 54.6 from 55.8. The highest readings we?ve seen in the non-manufacturing report have consistently been in the ‘prices paid? component, which has only underpinned Federal Reserve Bank inflation hawks? concerns. However, the price index is expected to ease back for the third consecutive month in September, supporting broad market speculation of additional rate cuts by the central bank throughout the rest of the year. Furthermore, the ‘employment? component unexpectedly plummeted down through the 50 level in August to 47.9 - marking a contraction - which was followed by a dismal non-farm payrolls report just a few days later. As a result, traders will be watching this component once again, as another reading below 50 would bode very ill for this Friday?s NFP report (October 5th), especially as the US financial and housing sectors are likely to have racked up substantial job losses during the month. As a result, now that the Federal Reserve has finally started to note major downside risks to growth and has stopped focusing on inflation, signs that the labor force is diminishing could lead markets to ramp up speculation of a 25 basis point rate cut in October. Additionally, softer spending in the non-manufacturing sectors could be an early signal of diminishing consumption growth in the US, upping the ante for an all-out economic recession.
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Bonds - 10-Year Treasury Note Futures
Treasury note futures remain contained to an ascending channel, possibly aiming to target the 109-28 level, and the release of ISM non-manufacturing on Wednesday may only boost the contracts as the figure could prove to be even worse than expected. Furthermore, US equity markets could continue to ease back from the recent record highs, bolstering the case for Treasury gains. However, if we see equities rocket higher once again, the contract could start to ease back towards trendline support at 109-04.

EUR/USD has finally started to ease back from its record highs - though they are still a stone?s throw away - as the pace of the pair?s rally slows. The broad weakness of the US dollar hasn?t received any help from economic data as home sales, labor market, consumer confidence, and inflation reports all proved to be softer-than-expected. The greenback may face another round of disappointing news as the ISM non-manufacturing index is scheduled to be released on Wednesday. The index is expected to ease back, but traders should keep an eye on the employment component, which may be useful in gauging the result of this Friday?s labor market data. However, the actual impact of ISM non-manufacturing on EUR/USD may be limited as traders will be anxiously awaiting the non-farm payrolls report at the end of the week. Nevertheless, if pending home sales are worse than expected, EUR/USD would target the recent record high if 1.4284. However, if the release of the non-manufacturing sector data proves to be surprisingly positive, traders may start to speculate that the retail and services sectors continue to fare well despite the economic slowdown, which could help send EUR/USD down to test 1.4110/20, with sharper declines taking aim on 1.4070.

Equities - Dow Jones Industrial Average
The Dow Jones Industrial Average backed off from Monday?s record high of 14,115.51, though price simply consolidated within a tight 100 point range. With major market-moving data scheduled to be released on Friday (non-farm payrolls report), US equities will likely stick to range trading. There is little consensus on whether the stock market rally will continue to plow on as investors ramp up speculation of another FOMC rate cut in October, or if things will take a grim turn as traders realize that the central bank?s policy actions may not be enough to halt an all-out recession. Nevertheless, if Wednesday?s ISM non-manufacturing figure weakens more than expected, the Dow could return its focus on a break below 14,000. On the other hand, “irrational exuberance” may continue to rule, and if the data is actually somewhat optimistic or simply in line with expectations, the equity index could hold aloft and continue its trek towards 14,200.

Written by Terri Belkas, Currency Analyst for DailyFX.com