ISM Non-Manufacturing (OCT) (12:30 GMT; 08:30 ET)
Expected: 54.0
Previous: 54.8

How Will the Markets React?

Conditions in 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 October, as the Institute for Supply Management index is estimated to fall to 54.0 from 54.8. Indeed, the Federal Reserve’s Beige Book report for October indicated that shipping activity was mixed, suggesting “some softening,” and indicating that the orders component will likely lead declines in the ISM index. The highest readings we’ve seen in the non-manufacturing report have consistently been in the ‘prices paid’ component, which has only underpinned the inflation concerns of the Federal Reserve, and the October reading should not be any different. Meanwhile, the ‘employment’ component should manage to hold above 50 after the most recent non-farm payrolls report showed that service-providing sectors added 190,000 workers in October, up from 127,000 during the month prior. Overall, the ISM non-manufacturing report is likely to be in line with the FOMC’s policy statement that cited major downside risks to growth that were counterbalanced by upside inflation risks. While these comments suggest that the central bank will not move to cut rates again in December, the financial markets have not paid heed to this interpretation and have instead continued to trade on their own accord. As a result, US economic data may only have a limited impact on fixed income, forex, and equity market price action as investors await clear cut signs from the Federal Reserve regarding their next policy move.

Bonds – 10-Year Treasury Note Futures

Treasuries staged yet another solid rally today, though the failure to maintain the last probe of new highs late last month is a valid reason to doubt the current breakout. However, if funds continue to flow into Treasuries, the contract could target the 112-00 level sooner rather than later. Monday’s US economic data may only help the case for such gains, as ISM non-manufacturing is expected to soften in October.

FX – EUR/USD

Market-wide weakness in the greenback and a rate cut by the FOMC has allowed EUR/USD to continue its ascent through 1.4500, and with the most recent COT data signaling that neither the Euro nor the US dollar trade at extreme levels anymore, further upside potential remains. US data on Monday may only highlight weakness in the economy, as the ISM non-manufacturing survey for October is expected to fall back. The news may only exacerbate the sell-off in the greenback and push EUR/USD closer to resistance from options barriers at 1.4550. Meanwhile, a stronger-than-expected ISM report may only provide the US dollar strength for a very brief time, as the solid uptrend in EUR/USD is likely to go undeterred for the time being.

Equities – Dow Jones Industrial Average

The Dow continued to trade lower on Friday and eased down through support at the confluence of the 100 SMA and the 38.2 percent fib of 12,517.94 – 14,198.10 at 13,556, though the index did end the day slightly higher. Whether the Dow can recoup some of these losses will likely be determined upon how shares in the financial sector fare in coming days. However, the release of ISM non-manufacturing on Monday could play a slight role, as a surprisingly strong or weak figure could help swing equities in one direction. Indeed, a lower-than-expected reading – especially if the index falls below 50 – could push the Dow through near-term support to test the 50 percent fib at 13,358. On the other hand, signs that the non-manufacturing sectors are outperforming could lead the equity index back above 13,600.

Terri Belkas is a Currency Strategist at FXCM.