On Friday, US non-farm payroll figures will be reported and are anticipated to point towards recessionary conditions in the US economy, despite the positive Q1 GDP reading. The previous NFP release in March came in at a sharp decline of 80,000 jobs, but given the recent increase in the ADP employment change of 10k (expectations were for a drop of 60k), there is speculation the figure could be a bit better than expected.

MAY 2 US Non-Farm Payroll (APR) (12:30 GMT; 08:30 EST)
Expected: -75k
Previous: -80k

Unemployment Rate (APR) (12:30 GMT; 08:30 EST)
Expected: 5.2%
Previous: 5.1%

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, despite the positive Q1 GDP reading. The previous NFP release in March came in at a sharp decline of 80,000 jobs, but given the recent increase in the ADP employment change of 10k (expectations were for a drop of 60k), there is speculation the figure could be a bit better than expected. However, the ADP report showed that only small firms of 1-49 employees and the services sector in general took on workers, as larger firms and those involved in the manufacturing and goods-producing sectors posted net job losses. Further evidence of deterioration in the manufacturing sector was seen in the April ISM index, as the employment component dropped to 45.4 from 49.2. 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. However, we are missing a key piece of evidence as the ISM services survey will not be released until next week, and the employment component of that figure tends to be a good leading indicator for NFPs. Given the fact that the ADP report reflected strength in the services sector, there is some potential that NFPs will be a bit better than current forecasts. If this is indeed the case, rate cut expectations will grow in favor of no change in policy when the Federal Reserve meets again in June, especially as the most recent FOMC policy statement signaled a pause and fed fund futures currently only price in an 18 percent chance of a 25bp cut to 1.75 percent.

Bonds – 10-Year Treasury Note Futures

A daily chart of Treasuries shows price wedged between significant support at the psychologically important 115 level and resistance from a falling trendine and the 100 SMA at 116-16. This consolidation signals some potential for a breakout, and with market-moving NFP data scheduled to be released, the move could come as soon as Friday. A weaker-than-expected figure could lead Treasuries to spike above noted resistance. However, if NFPs prove to be better-than-forecasted (as we suspect may be the case), the contract could easily plunge back down toward 115 as the markets continue to bet on no change in rates during the Fed’s next meeting in June.

FX – EUR/USD

EUR/USD remains very heavy, and our FXCM Speculative Sentiment Index for the pair flipped to a positive reading for the first time since 2006. As a contrarian indicator, the flip suggests that we could see a further weakness in the EUR/USD over the next few weeks. Furthermore, as Technical Strategist Jamie Saettele mentions at the end of our DailyFX NFP Preview, “the decline since 1.6018 is unfolding as an unmistakable impulse. 5 waves down from 1.6018 to 1.5554 was the indication that the larger trend had changed from up to down.” Furthermore, Jamie says that “(r)esistance for tonight and tomorrow morning should be strong in the 1.5500/1.5540 zone” and that “measured support does not begin until 1.5230 (100% extension of 1.6018-1.5554/1.5694). Subjectively, we favor a deeper decline to at least the 161.8% extension, at 1.4943, in the coming weeks.” Indeed, the NFP report is a known market-mover and Friday’s release could spark substantial volatility for the US Dollar across the majors. If the figure proves to be weaker-than-expected, EUR/USD could spike higher toward resistance. However, a better-than-estimated reading may have a bigger impact on the pair, and given signs that services sector hiring could boost NFPs in April, the probabilities are in favor of a sharp drop in the EUR/USD on Friday.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average managed to close just above the psychologically important 13,000 on Thursday. However, can it hold above this point and more importantly, can the index break above the confluence of trendline resistance and the 200 SMA near 13,050? Friday’s US non-farm payrolls report may determine that, as the figure is anticipated to fall for the fourth consecutive month, indicating a major deterioration in the labor markets. If NFPs prove to be even worse than expected, the DJIA could pull back sharply, especially if the unemployment rate jumps higher from 5.1 percent. On the other hand, if NFPs are surprisingly strong the index may jump as the markets judge that the bearish views of the economy were overdone. The next level of resistance above the 200 SMA sits at the 61.8 percent fib of 14,198 – 11,634 at 13,218.

Terri Belkas is a Currency Strategist at FXCM.