June 6 US Non-Farm Payroll (May) (12:30 GMT; 08:30 EST)
Expected: -60K
Previous: -20K

What Are The Markets Facing?

The U.S. is economy is expected to have lost another 60,000 jobs when Friday’s Non-Farm payroll report is released. It will mark the fifth consecutive moth of job losses for a U.S. economy that is still being affected by the subprime crisis and now must contend with rising inflation on the back of record oil and food prices. The service sector’s addition of 90,000 jobs last month lessened the impact of continued losses in the construction and manufacturing. Wednesday’s ADP private jobs report showed a net increase of 40,000 jobs led by a increase of 77,000 in the service sector. Last month’s report showed similar strength that would eventually translate to the NFP report. However, May’s ISM Non-manufacturing report which measures conditions in the service sector saw its employment component weaken to 48.7 from 50.8. The service industry gauge historically ahs proved to be more reliable than the private sector report when predicting the possible outcome of the NFP report. Fed Chairman Ben Bernanke at his recent speech in Spain expressed hope for improvement in the second half of the year for the economy, but still considered the economy fragile. Indeed, the housing sector continues to deteriorate with mortgage applications falling another 15.3% in the last week of May and fallout from the subprime continues to linger with the recent troubles of Lehman Brothers, and Wachovia. Bernanke also expressed his concern over the weak dollar’s contributions to rising inflation; increasing the chances the MPC has ended its easing policy. Speculation has now focused on the possibility of a future rate hike with fed fund futures pricing in a 21.5% chance of a quarter point increase at the September FOMC meeting.

Bonds – 10-Year Treasury Note Futures

After failing to break resistance at 166-05, which is being reinforced by the 50 Day SMA, treasuries have become directionless ahead of the Non-farm payroll report. Recent banking woes had lent support to the contract before chairman Bernanke’s all but eliminated any chance of another rate cut at the June 25th meeting. Despite his hawkish comments the odds for a rate increase at the October meeting have actually decreased to 21.5% from 28.6% a week ago. Another month of significant job losses should bring those odds even lower and provide support for bonds. Likewise, a better than expected job report will fuel rate hike speculation and weigh on bonds.

FX – EUR/USD

The EURUSD has remained below the 1.450 price level since Fed Chairman’s Ben Bernanke stated concerns that the weak dollar is giving rise to inflation and that interest rate levels would be sufficient to promote growth in the second half of the year. The pair has tested support at 1.5390 the 38.2% Fibo of the 1.437-1.6018 rally for the third time but failed to cleanly break through. Recent testimony from ECB President Trichet following that the monetary policy committee may raise rates at tits next meeting has generated Euro support. Expectations were that the central bank would keep rates unchanged until next year. The fundamental significance of a rise in interest rates supports our resident technician Jamie Saettele’s call for a Euro Bull rally where, “The minimum bullish objective is one pip above 1.5817”. An inline or worse print in the upcoming NFP report will continue to fuel bearish dollar sentiment, as the U.S. economy will be hard pressed to attain growth in the second half of the year if the labor market continues to weaken. The economy need to have generated jobs in May in order to reverse current momentum.

Equities – Dow Jones Industrial Average

Equities have remained heavy as the woes from the banking industry continue to concern investors. Stocks have been receiving some support from easing oils prices which fell below $122 per barrel as record energy costs have started to curb demand. Upcoming earnings reports from individual retailers will give some insight into consumer demand and the impact of the fiscal stimulus plan. However, the upcoming NFP report will give a stronger indicator of future demand from consumer as the stimulus package will only serve as a band aid if job losses continue to mount. Therefore, if the economy loses another 60,000 jobs as expected or more, traders will slash future growth outlooks and subsequently stock prices. Conversely, a consecutive better than expected result or an actual job increase would provide support for the index as it would increase hopes that the stimulus will accelerate the economy’s turnaround.

Terri Belkas is a Currency Strategist at FXCM.