This Friday's report may hold some important clues

A worker monitors a yellow pencil production line at the Musgrave Pencil facility in Shelbyville, Tennessee.
Luke Sharrett | Bloomberg | Getty Images
A worker monitors a yellow pencil production line at the Musgrave Pencil facility in Shelbyville, Tennessee.

A fresh look at September manufacturing activity Friday should be important for markets that are trying to figure out whether August's weakness was a once off or the start of a weaker trend.

Friday's lone U.S. economic report is the September flash manufacturing PMI, expected at 51.9 from 52 previously. The report is released at 9:45 a.m. EDT. There is also Baker Hughes oil rig count data at 1 p.m.

"With data continuing to be at best mixed and probably soft, every one of these data points is going to have market impact" if it does not come in as expected, said James Paulsen, chief investment strategist at Wells Capital. "If it were to make an outsized move, dropping to 50 … then I think it would have an impact." A number below 50 shows contraction.

The stream of soft August data started early on, with the monthly employment report coming in at just 151,000 — 30,000 shy of expectations. Then August ISM manufacturing data showed an actual contraction, dipping below 50. Car sales were soft, retail sales were soft and ISM nonmanufacturing data showed a slowdown in service sector activity.

Now that the Fed again kept rates on hold, the markets are focused on whether it will actually hike rates in December as expected. That will depend on whether the economy holds up, making the question of whether August's softness reverses in September very important.

JPMorgan economists on Thursday pointed out, in a note looking back at the employment report, that there were 79,000 people not at work because of weather in August. That number usually averages about 29,000 and some of the increase could be explained by flooding in the South. So they concluded that while the weather impact is unclear, there could be a swing in payrolls of about 40,000 between August and September.

"August tends to be a very noisy month, subject to big revisions," said Jon Kozy, senior research analyst and macro strategist at U.S. Trust, Bank of America. "We'd like to see the September data. The economic data — and chair Yellen confirmed this in her statement — have been pretty solid and point toward this continuation of trend-like growth in the economy."

Stocks rallied hard for a second day Thursday after the Fed Wednesday held rates steady and reduced its outlook for rate hikes to one for this year, and just two for next year. The S&P 500 rose 14 to 2,177.

"We're basically in this grind-it-out market, maybe flattish to an upward trend. What the Fed did, in extending the cycle, is positive for equities," said Kozy. "It's hard to be optimistic or super excited about equities, but it's hard to be overly pessimistic."

There are several Fed speakers Friday. Philadelphia Fed President Patrick Harker, Atlanta Fed President Dennis Lockhart and Cleveland Fed President Loretta Mester speak at noon in Philadelphia on a panel about the Fed's role in communities.

Dallas Fed Robert Kaplan speaks at 12:30 p.m. EDT at the Texas Oil & Gas Association Lone Star Energy Forum.