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A big week for US data may clash with bullish market sentiment

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Investors need to keep an eye on this month's ISM data for key economic clues

The ISM non-manufacturing index is due out Tuesday shortly after the market opens, and one strategist is watching the report for clues to broad economic health and whether its bullish market sentiment is supported.

The non-manufacturing report is set to come out days ahead of the closely watched U.S. employment situation report on Friday morning, said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. He'll be watching the ISM's data closely for several reasons; here's why.

• The non-manufacturing survey, which measures activity in areas such as construction and agriculture, is the second-most-important economic indicator after the employment report, Schlossberg said. The ISM's monthly report will be strong foreshadowing for the non-farm payrolls report on Friday, he added.

• Both reports will reflect not only the strength of the U.S. economy but the inflation outlook, as well as the next move for the Federal Reserve and whether it will maintain its relatively positive outlook.

• Schlossberg said there is a chance that key parts of the employment report, such as wages, could disappoint the market, as recent personal income and personal spending data has been relatively soft. Furthermore, the ISM's data due out on Tuesday will likely preview that weakness.

• If the data on Tuesday misses estimates, the first market to feel the disappointment will be the U.S. dollar, Schlossberg said. The fixed income market would also likely see bond yields fall on a soft print. As far as stocks go, disappointing non-manufacturing data would prove neutral or positive for equities as it would indicate the Federal Reserve may tamp down its tightening plans.

The market is expecting a reading of 59.0 on the ISM non-manufacturing index, according to FactSet data. This reflects a slight month-over-month drop; a reading over 50 percent is traditionally seen as bullish for the economy.

Bottom line: The ISM non-manufacturing data due out on Tuesday will be a key indicator of the inflation outlook, the non-farm payroll report on Friday, and whether or not the Fed's bullish outlook is supported.