This key economic report could trigger a sell-off in equities

A key economic report due out Thursday morning could be the true tell for Friday's jobs number.

The Institute for Supply Management is set to release its non-manufacturing data Thursday shortly after the opening bell, and economists are expecting a reading of 56.9, which comes in lower than last month's figure of 57.4. Generally, a reading above 50 indicates the non-manufacturing economy is generally expanding, and below 50 typically indicates contraction.

This report is a critical one to watch, said Boris Schlossberg, managing director of foreign exchange strategy BK Asset Management, because it gives a read on activity across several sectors, including services and construction.

If the reading on the non-manufacturing data is stronger than economists are expecting, equities and the beaten-down U.S. dollar should stand to benefit. The bond market, too, may see a boost from a figure that beats estimates.

However, "We think that the ISM non-manufacturing could actually disappoint to the downside tomorrow. And if that happens, that's going to create further sell-off of the dollar and could trigger a sell-off on equities, which have had a huge rally over the last several days and are very much due for a correction," Schlossberg said Wednesday on CNBC's "Trading Nation."

The "prices paid" component of the data is a good read, too, on inflation in the market. Within the report, this figure is important to keep an eye on as inflation normally factors into the Federal Reserve's decisions on interest rates. A weak figure there could make "the whole idea of a Fed rate hike very difficult to believe, and the market could suffer a sell-off as a result of that," Schlossberg said.

"We've been above 50 for quite a long time. But the critical question here is whether we are going to grow from the last month or are we are going to contract; that is what the market is going to be watching very carefully," he added.

In fact, the ISM non-manufacturing index has not dipped below the 50 mark since January of 2010, when the reading came in at 49.60. The next month saw a rebound of 50.80.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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