5-Mar ISM Non-Manufacturing (FEB) (15:00 GMT; 10:00 EST)
Expected: 47.3
Previous: 44.6

What Are The Markets Facing?

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 improved very slightly in February, as the Institute for Supply Management index is estimated to rise to 47.3 from 44.6. However, if the index holds below the 50 level as expected, the news will not be a positive sign for the US economy as the data would only add to the mountain of evidence pointing towards a recession. Indeed, the Federal Reserve has already acknowledged a deterioration in consumption growth, as the minutes from the January FOMC meeting revealed that members though that “(r)ecent data as well as anecdotal information indicated that consumer spending had decelerated considerably, perhaps partly reflecting a spillover from the weakness in the housing sector...In addition, consumption expenditures were being damped by slower growth in real disposable income induced by high energy prices and possibly by a softening of the labor market....And spending in the future could be affected by an ongoing tightening in the availability of consumer credit amid signs that lenders were becoming increasingly cautious in view of some deterioration of credit performance on consumer loans and widening expectations of slower income growth.” 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 75bp cut on March 18. The chances of such a move have jumped up to 78 percent from 0 percent just last week, while a 25 or 50bp cut is essentially guaranteed. As a result, traders should keep an eye on the upcoming ISM report as disappointing news could leave futures skewing the odds sharply in favor of a 75bp cut.

Bonds – 10-Year Treasury Note Futures

Bonds recently ran into resistance at 118-25, after recent recession fears weren’t enough to push bonds high enough to retest its 1/23 high of 119-05, Since, ISM Non-Manufacturing is expected to rebound from the month prior, a disappointing reading will heighten risk aversion and may see the contract bid up through resistance. However, with treasuries reaching overbought levels and mounting fears of a bubble forming, an in line or stronger ISM print should send prices lower.

FX – EUR/USD

Wednesday’s release of the ISM Non-Manufacturing Composite is expected show a rebound to 47.5 from 44.6, after January’s reading was the fastest contraction since the last recession. It was last month’s number that triggered recession fears and infused the markets with the prevailing risk adverse sentiment. Surprisingly, the dollar rallied off the news as the belief was that a global downturn was forthcoming and the U.S. may be ahead of the curve in their monetary policy. It was short lived as subsequent fundamental data and testimony from Fed officials showed that the ills of the U.S. economy were worse than expected and weren’t having as far reaching affects as speculated. This propelled the Euro through the once unattainable 1.50 barrier, reaching a record high of 1.5275. The pair has since consolidated in the 1.5170-1.5225 range as markets wait for the next fundamental indicator to signal a direction in the pair. A disappointing ISM Non-Manufacturing number may push the pair to 1.54, where technicals indicate it could run into resistance and usher a profit taking Euro bear rally - as pointed out in Jamie Saettle’s Technical Report . A stronger than expected ISM print, especially if it surpasses the 50 Boom/Bust level will calm recession fears and lead to a reversal sooner, especially after Eurozone GDP showed weakening consumer spending.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average is struggling to recover from support at the 12,115/25 level, as the reemergence of a bid tone will keep the index in its one month range. A return to risk aversion in the markets has weighed heavily on global stock markets in recent days, as fears of additional subprime-related losses and the impact of a possible US recession lead investors to flock to traditional safe-haven securities like Treasuries. Nevertheless, with carry trades starting to show mild signs of recovery on Tuesday, financial markets could stabilize somewhat in the near-term, especially if ISM non-manufacturing improves upon release on Wednesday. On the other hand, a surprisingly weak figure could drive the Dow for a more severe test of 12,000, with a break lower targeting the January 22 low of 11,635.

Terri Belkas is a Currency Strategist at FXCM.