By DailyFX – 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 Thursdays 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 Departments 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. Whats 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 tomorrows 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 FOMCs
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 Thursdays 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. NFPs 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.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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