Get Ready for NFP, Powell

A second soft ISM reading ended talk of a pause from the Fed and placed rate cuts back in play. Expect prolonged fluctuations today (fake breakouts & reversals) in the midst of today's US US non-farm payrolls (NFP, earnings & revisions), a speech  from Powell and a high likelihood for Fed-related tweets from Trump. NFP (more below) and hawish dissenter Rosengren are due at 8:30 Eastern (13:30 London), followed by Powell's crucial speech at 14:00 Estern (19:00 London). Below is the weekly English Premium Video clarifying the next positioning after the 3 indices trades hit their targets.

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The ISM non-manufacturing index fell to a three-year low just days after the manufacturing survey hit a 10-year low. It was at 52.6 compared to 55.0 expected and much worse than low-estimate of 54.0.

The initial market reaction was a continuation of the 'risk off' rout from Tuesday's poor manufacturing survey. Shortly afterwards, it morphed into a USD selloff and a rebound in equities. That was helped along by higher pricing for Fed cuts. The US 2-year fell to cycle lows at 1.366% and Fed fund futures pushed to price in an 85% chance of an Oct 30 and a 60% chance of another cut in December.

Fed hopes and the typical buy-the-dips mentality quickly swung a 55-point low-to-high turn in the S&P 500 and that helped to pare some of the declines in USD/JPY. More broadly, the dollar stayed under pressure.

Overall, it was a tougher day to put together a coherent narrative. There is a delicate balance in equities at economic turning points. There is always the hope that the Fed will save the day. At this point in 2008, US equities were hitting record highs on the belief that Fed cuts would save housing and boost the economy. At other times, that bet has been a good one but it will come down to how much economic damage the trade war has done, or will do if it escalates after meetings next week.

In Brexit news, the mood is souring as the EU and Ireland edged towards rejecting the Conservative offer. For Johnson, however, it has given him some credibility and that could translate into a better election showing. If he can command a large majority, that would put the EU in a tougher spot down the road and raise a true possibility of a no-deal Brexit.

Looking ahead, the employment component of the services ISM survey was an ominous sign for Friday's non-farm payrolls report. It fell to 50.4 – the lowest since Feb 2014 -- from 53.1 last month. It has a mixed record on forecasting the jobs report and September is notoriously tricky, but it adds another risk. The consensus for the 145K but the market has likely moved to something 20K lower.