cross markets data reaction

US Dollar, Equities And Treasury Markets Screen ISM Services For Action

Tuesday, 03 April 2007 23:29:21 GMT  |  John Kicklighter, Currency Analyst

ADP Employment Change (MAR) (12:15GMT)	ISM Non-Manufacturing (MAR) (14:00GMT)
Expected:                 135K	Expected:                 55.0
Previous:                    57K	Previous:                  54.3

How Will The Markets React?

After two disappointing days of economic data, US market participants will now be turning their attention (and hopes for volatility) to Wednesday morning’s ISM non-manufacturing report. In its previous reading, the service-sector activity gauge slipped to its lowest level in nearly four years. Officially, the market will be working off of a consensus for a 55.0 print for the March number, versus the lowly 54.3 reading the month before. However, there are questions as to whether this cautiously bullish outlook aligns itself to the conditions for the month or if the indicator will even rouse a response for the market. For expectations, there are a number of concerns that have eroded the validity of the official forecast. From Monday’s disappointing manufacturing report, the employment and prices paid components could easily lead to similar results from the equivalent sub-gauges in the service survey. Furthermore, there are specific concerns for the non-manufacturing report related to demand and construction. Concerns were stoked two weeks ago when the housing permits data hit fresh lows. What’s more, the rise in sub-prime defaults and the critical media attention the lenient lenders received in early March could have further weighed on construction activity. More importantly, woes in the residential market may have leaked into other areas of the economy. Demand for goods and services last month likely suffered from the loss in home equity as well as rising energy prices and falling stock prices. The next question traders should ask is whether this indicator will even generate market movement. Typically, the ISM report facilitates little movement in treasuries and the dollar; and this will likely be the case tomorrow should the number print close to the market’s outlook. On the other hand, a big surprise (especially to the downside) may offer evidence the economy is weathering or folding under pressure from the manufacturing and housing sectors.

Bonds – 10- Year Treasury Note Futures

Treasury yields have been slowly climbing higher since the middle of March when the major inflation indicators reported a slight rebound in pressure. Specifically, the PPI and CPI numbers accented the market’s surprise that the FOMC would not remove its inflation warning at its last meeting, despite a considerable downturn in housing and manufacturing data over the same period. This is where tomorrow’s ISM non-manufacturing report comes in. If service sector activity, which accounts for an estimated 90 percent of economy, falters; the balances may be tipped so that policy members change their priorities. Should service-based firms start to share the weakness in the housing market, it would certainly detract from the attention paid to persistent growth in the PCE and CPI numbers.

FX – EUR/USD

The US Dollar has seen a healthy rally on the revival of the carry trade and signs that the dispute between Iran and the UK will end in peace. Furthermore, pending home sales surprisingly improved in February, helping to offset the gloom and doom stories of subprime lending. EURUSD has slipped to an important supporting trendline but also remains wedged below major resistance at 1.3400. Will the pair manage to break out just as USDJPY did today? It remains to be seen, but the release of ISM Non-Manufacturing could be the impetus to get price action going. The figure is anticipated to improve in February, indicating that the services sector and consumption growth remains alive and well. However, the key factor traders will be looking at will be the employment component, especially ahead of NFP’s on Friday when US markets will be closed for holiday. Should the index improve and remain above 50, markets may be ready to bid the greenback to send EURUSD sub-1.3300. On the other hand, a drop below 50 – signaling contraction – would likely propel EURUSD to test 1.3400 once again as prospects for NFPs and the labor market as whole will diminish quickly.





Equities – S&P 500 Index

The recent sell-off in equities took a breather today as easing tensions in Iran sent crude oil down below $65/bbl while a surprise gain in pending home sales stirred up optimism on the housing market. Indeed, the S&P 500 index closed up 0.9 percent at 1,437.77, with all 10 major industry groups in positive territory. Financial stocks rebounded from recent losses as Accredited Home Lenders surged 17.8 percent to $10.04 on news that the subprime mortgage lender had secured a $1.1 billion line of credit from two banks. US equities may further their gains on the release of ISM Non-Manufacturing. While the release of the figure will be important in order to gauge the status of the service sector, traders will be looking towards the employment component. Since the service sector is a large, critical part of the US economy, the shifts in employment levels are often used to help forecast Non-Farm Payrolls which will be released on Friday. However, with US markets closed on Friday for holiday, price action may become even more volatile on release as traders look to get in on the sentiment regarding the labor market.

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