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The Week Ahead

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ISM, Fed and payrolls

Mon, Nov 2 2009, 14:21 GMT
by Przemysław Kwiecień

X-Trade Brokers, XTB

After a bearish end of October investors aren’t left with an empty calendar in the first days of the new month. Actually, the data and events scheduled for this week may decide on the sentiment in a longer perspective.

October turned out to be quite similar to September when it comes to market sentiment, that is a strong two decades were followed by a nervousness at the end of the month. After investors turned back to selling soon after the US GDP release, a chance of a deeper correction on major markets has been increased. However, the odds might be verified very quickly with the storm of new information – starting from today’s ISM, through Fed’s meeting, through the payrolls.

The ISM proved to be a very solid predictor in historical terms. Actually this year it wasn’t very different. Those who stocked their hopes on indicator’s rebound in April or May and invested accordingly shouldn’t be disappointed right now. However, after leaping by 20 points from December 2008 to August and retracing by 0,3 pts. in September the index seems to be at the crossroads. What shall we expect? The most optimistic and at the same time the most unlikely scenario is for the index to move tirelessly to 60 points level. That would spell a rapid recovery propelling stock markets and probably the EURUSD (and perhaps some commodities) to new highs. Another scenario is for the index is to hover in the 50-55 pts. range. Seems gloomy at first, but actually it isn’t that bad. That would correspond with an expansion of around 3%, a moderate climb to pre-Lehman levels for stock markets and (still) a possibility to test 1,60 by the EURUSD as the Fed would be in no hurry to tighten a monetary policy. Finally, if the index moves back below 50 pts. it will be a warning signal. This is exactly what happened in 1981, negating previous positive signs and predicting another blow of recession. Even if today’s release is not conclusive, the index is to be watched closely.

Two other events which are sure to electrify markets this week are the Fed’s meeting on Wednesday and payrolls on Friday. Actually, it makes sense to consider them together. Investors might wonder, when the Fed is ready to remove “extended period” formula from the statement and it seems that it is not going to happen for as long as labor market is weak. While Canadian and Australian labor markets already showed some improvement in the US it might take more time, leaving a room for the Fed to leave rates at historical lows.

Speaking about the Fed and payrolls it is worth to pinpoint at an awkward dependence of the EURUSD (or the dollar in a broader sense) on the US data. On one hand, removing “extended period” formula from the statement would be bullish for the dollar (and bearish from the EURUSD). But then again an improvement on the labor market (necessary to push the Fed to remove the formula) would be positive for the stocks and thus (at least that worked during the last year) for the EURUSD. This dilemma is to be resolved sooner or later. In the short term, however, seems to be locked into a positive dependence on stock markets in a range of 1,4682 – 1,5063.

Published on  Mon, Nov 2 2009, 14:23 GMT