US Non-Farm Payrolls (FEB) (13:30 GMT; 08:30 EST)
Expected: 25K
Previous: -17K

Unemployment Rate (FEB) (13:30 GMT; 08:30 EST)
Expected: 5.0%
Previous: 4.9%

What Are The Markets Facing?

On Friday, US non-farm payroll figures will be reported and are anticipated to point towards recessionary conditions in the US economy, and the markets have been fraught with uncertainty ahead of the news. The previous NFP release in January came in at a shocking decline of 17,000 jobs, and with the most recent ADP employment change down 23,000 jobs, there are concerns that NFP’s will show a negative reading once again. The ADP report showed that the manufacturing and goods-producing sectors posted net job losses and while the services sector continues to add workers, though at a far slower pace. Further evidence of deterioration in the services sector was seen in the ISM non-manufacturing index which held below 50.0, indicating contraction, for the second consecutive month. Last week’s initial jobless claims rose 19,000, an increase for a second straight week and the highest since October 2005. Negative NFP data would lend support to the view that current economic weakness is slowly making its way from Wall St. to Main St. via the labor market as the US consumer makes up 70 percent of the economy. Indications of labor market weakness would lend support to the Federal Reserve to cut rates sharply at its next meeting March 18th. Expectations call for at least another 50bp cut to the fed funds rate, though traders are ramping up speculation of a whopping 75bp reduction to 2.25 percent.

Bonds – 10-Year Treasury Note Futures

Treasuries recently ran into resistance at 118-25, after recent recession fears weren’t enough to push bonds high enough to retest its January 23 high of 119-05. However, with the market-moving NFP report set to be released on Friday, anything can happen. A surprisingly weak figure could lead Treasuries to punch above near-term resistance as traders move to price in a 75bp cut by the Fed on March 18. On the other hand, an improvement in line with or greater than expectations could help weigh the contract down towards the 117 level.

FX – EUR/USD

Although the Nonfarm payroll report is expected to show an increase of 25 thousand jobs, recent economic data suggest a weak labor market. Wednesday’s ADP employment change was reduced by 23 thousand jobs while the ISM Non-Manufacturing Index showed a contraction – it came in below 50 - yet improved over the previous month. A shrinking labor market would further lend support to the Federal Reserve to cut its key interest rate at the banks next meeting March 18. The markets are expecting at least a 50bp cut to 2.50 percent, but if NFPs fall negative, traders will quickly ramp up speculation of a 75bp cut. On the other hand, a better than expected result could lead expectations to shift in favor of a relatively mild 25bp reduction, which could lead the US dollar to surge in a relief rally.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average is struggling to hold above support at the 12,000 level, as the reemergence of a markedly bearish tone weighs stocks down. A return to risk aversion in the markets has weighed heavily on global stock markets, 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. If Friday’s NFP report shows another contraction in jobs in February, the news could lead the Dow to open below the critical 12,000 level. On the other hand, a surprisingly strong figure could support the Dow for a bit longer, though the trend for the index remains very much to the downside as MACD remains bearish.

Terri Belkas is a Currency Strategist at FXCM.