Change in Nonfarm Payrolls (SEP) (08:30 ET; 12:30 GMT)
Expected: 100K
Previous: -4K

Unemployment Rate (SEP) (08:30 ET; 12:30 GMT)
Expected: 4.7%
Previous: 4.6%

How Will The Markets React?

The result of the September US non-farm payrolls (NFPs) has been eagerly awaited ever since the index unexpectedly dropped for the first time in four years by 4,000 in August. The surprising news was one of many factors that led the Federal Reserve to cut rates in September, which prompted a rally in the US stock markets and a plunge in the US Dollar. This time, the median estimate of Bloomberg’s poll of 83 economists shows estimates for NFPs to rebound by 100,000. The expectations are supported by many other labor market indicators for the month of September: the ADP employment survey showed an increase of 58,000 in private payrolls, Challenger layoffs fell 28.5 percent from last year, the four-week moving average of jobless claims dropped to 311,000 from 324,000, and the employment component of the ISM non-manufacturing survey rose to a three-month high. However, there have been heavy losses in the financial sector, and while this may not be enough to pull NFPs lower this month, the lingering problems sprouting from the subprime-mortgage crisis could seep into other areas as well. In fact, the unemployment rate is anticipated to edge up to 4.7 percent from 4.6 percent. This has been a somewhat gradual process, as the unemployment rate has crept higher throughout the year. The August figures actually reflected a rate of 4.642 percent – up from 4.395 percent in March – highlighting that it won’t take many job losses to tip the percentage high enough to be rounded up to 4.7 percent. Nevertheless, the markets may take an increase in the unemployment rate more seriously than an improvement in NFPs, as traders anxiously try to gauge whether the Federal Reserve will cut rates again on October 31st.

Bonds – 10-Year Treasury Note Futures

Treasury note futures remain contained to an ascending channel, possibly aiming to break above the 109-28 level, and the release of labor market data on Friday may only boost the contracts as the figures 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.

FX – EUR/USD

EUR/USD has finally started to ease back from its record highs and has broken below trendline support 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, consumer confidence, and inflation reports all proved to be softer-than-expected. The greenback may face another round of disappointing news as critical labor market data is scheduled to be released on Friday. First, non-farm payrolls are anticipated to rebound quite a bit during the month of September. However, this particular indicator is subject to major revisions and could skew the sentiment of the report. At the same time, the unemployment rate is predicted to tick up to 4.7 percent from 4.6 percent, which could carry quite a bit of weight in the markets and with the Federal Reserve, as the outlook contained in their semi-annual report to Congress called for “the civilian unemployment rate…to lie between 4-1/2 percent and 4-3/4 percent in the fourth quarter of 2007.” With the rate nearing the top of that range already, the chances of another cut to the fed funds rate will likely increase. As a result, very weak employment numbers could send EUR/USD up to the 1.4200 level. On the other hand, if NFPs jump even more than expected, or if revisions to prior data reflect a net improvement, dollar bulls could push EUR/USD down through Thursday’s lows of 1.4068 towards the confluence of trendline and Fibonacci support at 1.3930.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average continues to back off from Monday’s record high of 14,115.51, though price action suggests that this may just be a sign of consolidation ahead of major market-moving data scheduled to be released on Friday (the non-farm payrolls report). 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 the non-farm payrolls report proves to be weaker than expected AND the unemployment rate edges up to 4.7 percent, the Dow could actually return its focus on a move higher amidst expectations of another rate cut.

Terri Belkas is a Currency Strategist at FXCM.