Horrible ISM Non-Manufacturing - All Change?

TThe US ISM non-manufacturing report was very weak, with a particularly weak employment component. This negative report easily trumps all the positive data this week out of the US. How will the market react?

Note: also see our full update from just a little whlie ago for more perspective - we're updating again here in markets after the whiplash generated off the negative ISM non-manufacturing report.

The US ISM non-manufacturing report should be considered the premiere survey of US business conditions as it covers the US services industries, which represent some 70% of the US economy. Today's report for August was very negative, at a barely expansive 51.5 vs. 53.2 expected and 54.3 in July. Particularly of concern was the employment component of the survey dropping below 50 to 48.2 - a recessionary reading and the lowest number since January of this year. Also of concern was a drop in the New Orders component to 52.4 (lowest since last December) from 56.7 and a freefall in New Export Orders to 46.5 from 52.0 in July.

Reaction: all change?

The ISM non-manufacturing report today completely erases any positive US data momentum and actually swings the needle all the way back to the negative side. This means that any EURUSD or GBPUSD move lower must now take place on the "generalized fear and loathing" theme rather than the "US not looking so bad at the moment after all" theme that we discussed in our earlier report. If risk appetite reverses (as it ought to if the initial rally today is only based on the less than overwhelmingly positively jobs report), then the commodity currencies will suddenly reverse from strongest to weakest, just as the JPY today has gone from the weakest to the strongest currency among the G-10 in the space of couple of hours, first selling off on the lower rates triggered by the US employment and then reversing to the strong side off the ISM non-manufacturing. But let's see if this is a rational market...if this ISM can't shake confidence, then we have some persistent bulls indeed.

Bond sell-off

An additional note for those watching bond yields. As we mentioned recently, the US is planning its smallest auction of 3-,10- and 30-year securities in some time. We've just seen a huge backup in yields again on this bond sell-off - so if buyers step up to the plate on these juicier yields again, it will have an important effect on the FX market, with the JPY, as always, at the center of any reaction to the moves in interest rates.

Chart: JPY - from dog to darling in 2 hours.

Today's JPY cross reversal was remarkable as the currency ping-ponged off the US data releases today and the moves in US treasury markets. Next week's US treasury auctions will be a key test of treasury demand and US yields. The US 30-year yield, for example, backed all the way up to above some key resistance around 3.83% today before bonds found strong support from the ISM release. That's a yield level worth watching next week.

Obama out speaking

It was trying on our credibility to see Obama out trying to put a positive spin on today's employment report. More perspective on today's payroll release: the birth/death statistical adjustment (an assumption of how many unmeasured jobs have been created) of +115k was almost twice the size of the overall delta in the private payrolls of +67k. As Mr. Obama was out speaking, the market was possibly hoping for a hint at some stimulus or even an intention of the extension of the Bush tax cuts, but instead he tried to spin the weak data and admonished Congress that it needs to pass his small business bill. This is a very, very weak move from the president, who could inject immediate stimulus and help the economy very quickly with the much discussed payroll tax holiday and help his party's chances at the election in November. Why on earth should risk find anything to celebrate now?

Stay careful out there and have a great weekend.