US Non-Farm Payolls (DEC) (13:30 GMT; 08:30 EST)
Expected: 70K
Previous: 94K

ISM Non-Manufacturing (DEC) (15:00 GMT; 10:00 EST)
Expected: 53.7
Previous: 54.1

What Are The Markets Facing?

On Friday, the all-important US non-farm payrolls report will hit the wires, and while this release hasn’t been extremely market-moving in recent months, it may play a large role in the Federal Reserve’s next rate decision at the end of the month. NFPs are forecasted to ease to 70,000 in December from 94,000 the month prior, with risks for a surprise largely to the downside. Meanwhile, conditions in US non-manufacturing sector – which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance – are anticipated to have deteriorated during December, as the Institute for Supply Management index is estimated to fall to 53.7.0 from 54.1. Indeed, the Federal Reserve has already acknowledged a deterioration in consumption growth, as the December FOMC policy statement noted, “Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending.” 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 FOMC, and the December reading should not be any different. While this suggests that the central bank will not move to cut rates again in January, the minutes of the December FOMC meeting indicate otherwise. Indeed, some members have become worried about “the risk of an unfavorable feedback loop...leading to additional tightening of credit...(that) could require a substantial further easing of policy.” With US data reflecting eroding economic conditions and the financial markets still in turmoil, it’s no wonder that futures are increasingly pricing in a 50bp cut on January 30. The chances of such a move have edged up to 24 percent from 0 percent just a few days ago, while a 25bp cut is essentially guaranteed. As a result, traders should keep an eye on Friday’s NFP and ISM report as disappointing news could leave futures skewing the odds sharply in favor of a 50bp cut rather than a 25bp cut.

Bonds – 10-Year Treasury Note Futures

Treasury note futures have broken above trendline resistance and the 114-00 level, and with US economic data likely to deteriorate further, it may only be a matter of time before the contract targets the 115-00 level. On the other hand, a sharp reversal in US equities could weigh on Treasuries, sending them to support near 113-07.

FX – EUR/USD

The Euro rally has gone undeterred, though EURUSD has met resistance at 1.4770 and an additional layer looms above at 1.4810. Friday’s US economic data isn’t likely to bode well for the beleaguered greenback, as NFPs are anticipated to ease to 70,000 while ISM non-manufacturing is forecasted to reflect slowing in the services sector. With traders already betting heavily that the FOMC will cut rates by 25bp at the end of the month, disappointing news on Friday will likely lead futures to price in a 50bp cut instead. Fed fund futures are already predicting a 38 percent chance of a 50bp cut, and as these probabilities rise, the greenback will fall. As a result, a clear break of resistance may go on to target the record high of 1.4967 and even push beyond 1.50. On the other hand, a surprisingly strong NFP result could set the US Dollar up for a short-term rally that would push EURUSD towards support at 1.4590.

Equities – Dow Jones Industrial Average

Declines in the Dow Jones Industrial Average have accelerated rapidly, and MACD on the daily charts has shown a bearish crossover. Where the Dow goes from here will depend primarily on the status of risk aversion in the markets as well as financial market news, but it is worth noting that support looms below at 12,725 and 12,518. On Friday, the release of US NFPs and ISM non-manufacturing could weigh the Dow lower, as continuously deteriorating conditions raise the risks that the Federal Reserve will cut rates at the end of the month – and where interest rates go, equities go. On the other hand, a surprisingly strong NFP report could drive the Dow higher for at least a brief time, as the markets may judge that consumption will remain resilient despite all of the soft spots in the economy.

Terri Belkas is a Currency Strategist at FXCM.