Non-Farm Payrolls (MAY) (12:30 GMT)
Expected: 135K
Previous: 88K

ISM Manufacturing (MAY) (14:00 GMT)
Expected: 54.0
Previous: 54.7

How Will The Markets React?

One fundamentally-packed US session has passed without a decisive break for the US markets; but can they survive a second day of the same? Heading into Thursday’s session, traders were glued to their charts and news sites awaiting the release of the first quarter GDP revision, Chicago Purchasing Managers Index, House Price Index, construction spending report and the weekly jobless claims figures. All in that order of importance. Whether or not the markets would make their move on Thursday was ultimately a factor of how the growth number printed. Therefore, when the Commerce Department’s recalculation of annualized Gross Domestic Product reported a deceleration from an already discouraging 1.3 percent pace to an even weaker 0.6 percent rate, the analyst in every trader went to work. While growth was essentially halved, the official consensus had already predicted a drop to 0.8 percent. What’s more, the breakdown, showed the deterioration was largely focused in gross fixed investment. Components for residential investment and consumer spending actually improved from their first reads. Subsequently, fundamentalists were not surprised with the contractions, but found a pleasant surprise with the individual improvements. Looking ahead to tomorrow slate of releases, the May non-farm payrolls report and ISM Manufacturing survey will be saddled with the responsibility of choosing a direction for the market. The employment data will have the first crack at guiding idle capital. In recent months, the indicator has become the unofficial conductor for US growth and inflation. Steady labor and wage trends have sustained consumer spending, which in turn has been the single unshakable pillar of growth for the economy. A wide divergence in the NFP print may be the trigger for traders. However, even if the gauge falls flat, the number two, top-market mover (the ISM survey) will have its go an hour and a half later.

Bonds – US 10-Year Treasury Note Futures

The pressure keeps on building in the treasury market, and it is especially intense for the benchmark 10-year note. This morning, yields to a nine-month high before pulling back before the close. The move was made despite a decidedly neutral mix of data for the entire session; and perhaps gives an indication as to how jumpy traders are knowing that yields are coming upon technical constraints. For the nearby futures contract, the levels are clear with a 106-11 horizontal support and a very steep trend channel that has driven spot right into that floor. With the teetering technical setup and the anxiety of the masses in mind, traders turn to tomorrow’s economic calendar. The employment and ISM numbers will each have their chance to break the market, and only one needs to perform.

FX – USD/JPY

As US data continues to falter and Japanese data proves to be even worse, USDJPY has stalled just below 122.00 as daily charts show the pair in a severe wedge that can potentially lead to a powerful breakout. With the infamous NFP report due to be released on Friday, the event could be just the trigger to get USDJPY going. Estimates for NFPs are for an improvement to 135K from 88K, signaling further tightness of the labor market and potentially leading Average Hourly Earnings to rise. The combination of stronger NFPs along with mounting wage growth could prove quite bullish for USDJPY, as the data would underpin the FOMC’s May 9th commentary that tightness in the labor market provided upside risks for inflation. However, it will take a break above January high of 122.19 before USDJPY bulls will really be able to take over. On the other hand, the US economy is clearly on shaky ground, and it remains to be seen whether employment conditions can continue to improve even with the marked economic slowdown. As a result, NFPs could post well below expectations and only ride the wave of Thursday’s dollar bearish sentiment. This bearishness has yet to hit the USDJPY, but given the fragile conditions of current price, the pair could be in for a major plunge to test 121.00.

Equities – S&P 500 Index

The S&P 500 wrote off the dismal revisions to first quarter GDP, as the equity index inched 0.4 percent higher to close at second consecutive record of 1,530.62. Technology shares contributed the most to the S&P 500's move with Ciena and Novell showing the index's biggest gains. Ciena, the maker of computer-networking equipment, jumped 17 percent to $34.32 after second-quarter profit and sales topped analysts' estimates. Meanwhile, Novell advanced 6.3 percent to $7.82 as the seller of networking software and computer-consulting services posted second-quarter profit of 5 cents a share against analyst expectations of 1 cent.

The S&P 500 could be in for a rough and tumble Friday, as the infamous NFP report will be released at 12:30 GMT. Estimates are for an improvement to 134K, but the payroll figure is notoriously volatile and prone to revision. NFP’s impact on the S&P 500 may be limited, however, as there are many other releases on tap in the morning as well, including: Personal Income/Spending, Average Hourly Earnings, and ISM Manufacturing. As a result, the key will be to look for the overall sentiment that the data projects. Even if the fundamentals indicate that job growth is accelerating, signs that the Fed will keep rates on hold throughout much of the year (via strong wages and personal income/spending) could bring about some softness in equities. On the other hand, equity markets have remained inordinately bullish, and an encouraging NFP report could lead the S&P even higher.

John Kicklighter is a Currency Strategist at FXCM.