US Non-farm Payrolls (AUG) (08:30 ET; 12:30 GMT)
Expected: 100K
Previous: 92K

Unemployment Rate (AUG) (08:30 ET; 12:30 GMT)
Expected: 4.6%
Previous: 4.6%

How Will The Markets React?

This Friday, the long-awaited non-farm payrolls report for the month of August will be released, and the news promises to be exciting. Indeed, the indicator is a proven market mover given its difficult-to-handicap nature and its popularity as a barometer for conditions in the US labor market. NFPs are estimated to hit 100K, and improvement from the reading of 92K during the month prior. However, there are significant downside risks to this figure after ADP showed that private-sector job growth fell to a four-year low of 38,000 in August, while Challenger, Gray & Christmas announced that layoffs shot up 85 percent last month to 79,459. The Challenger job losses were centered mainly in the financial sector, which is not surprising as the collapse of subprime mortgage lenders has led companies as far ranging as Countrywide and Lehman Bros. to announce layoffs. Furthermore, the recent ISM non-manufacturing report indicated that employment in the services sector contracted for the first time since September 2003 to match the lowest level seen since March of that year. With the Federal Reserve paying special attention to the “timeliest” indicators, this Friday’s NFP report will be crucial to the central bank’s next monetary policy decision, as deterioration of the labor market could lead consumption to drop off quickly and weaken one of the major drivers of GDP growth.

Bonds – 10-Year Treasury Note Futures

Treasury note futures continue to trade near the high end of the current move, which is clearly a bullish sign, however, with heavy resistance above at 110-00, rallies may have difficulty accelerating. That said, the contract is not really threatening any significant support levels, even on hourly charts. The 60-minute charts show an ascending trendline at 109-08, and a break discounts bullish bias, but with heavy event risk loom on Friday with the NFP report, price action could prove to be especially choppy. If payrolls are released at a disappointing figure, Treasuries could take on resistance as markets bet on a September 18th rate cut. On the other hand, a reading in line with expectations will leave investors (and the Fed) more confident that the economy remains even-keeled, which would support the case for no policy action this month.

FX – EUR/USD

Despite volatile price action on Friday, the EUR/USD pair remains range bound, as mixed risk averse sentiment keeps US dollar traders on edge. Outside of the 1.3565 – 1.3685 range, the next level of resistance sits at the 78.6% fib at 1.3750, which could be the pair’s next bullish target. However, EUR/USD faces massive event risk on Friday as non-farm payrolls will be released. If the figure proves to be disappointing, the news will be highly bearish for the US dollar (bullish for EUR/USD) as traders will ramp up speculation of a rate cut by the Federal Reserve on September 18th. On the other hand, if NFPs are surprisingly strong, investors will bet that the economy remains resilient outside of the housing sector, which would support the case for steady rates this month. As a result, the sentiment could push EUR/USD down towards support at 1.3565, with sharp declines taking on 1.3485.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average continues to make its way higher after breaking above a descending trendline last Friday, with the index ending Thursday up 0.44 percent at 13,364.24. This trendline had blocked gains for the equity index since late July, and the Dow’s move above this level signals that price could be moving higher to complete a 78.6 percent retracement of the decline from the August 17th high at 13,700, and remains possible as long as credit jitters subside. Furthermore, it appears that this trendline has now become a support level for the index. On the other hand, over the past 50 years, on average, the Dow has fallen 1.2 percent during this month and leaves substantial risks for a drop in the index.

US equities face heavy event risk from Friday’s non-farm payrolls report, as it is a known market mover and could prove to be extremely disappointing. If the data indicates that the labor market has been impacted severely by the subprime mortgage crisis, the Dow could ease back towards the 13,189 level on concerns that the economy is truly stalling. On the other hand, if the report indicates that economic conditions remain relatively resilient, the equity index could continue to climb towards 13,700.

Terri Belkas is a Currency Strategist at FXCM.