"I would characterize it as more of the same. We're seeing decent job growth but nothing that would make you consider it to be explosive," said Stephen Stanley, chief economist at Pierpont Securities. "This rate of job growth is eventually going to get to a better pace, but it's going to take time…I think the Fed is less dependent on data than they let on." Stanley expects to see 160,000 jobs added and an unemployment rate of 7.4 percent.
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Traders said the market expects a slightly better-than-expected jobs report, and they were counting on the Fed to begin paring back on its buying. An unknown factor, however, is the potential for U.S. military action against Syria if Congress approves a military strike on the country for using chemical weapons on its citizens.
"I think they decided in the spring that QE was actually doing more harm than good. It's hard to imagine anything short of a disaster that would change their assessment here. The other wild card hanging over everyone's head is this situation with Syria but it may not rise to the level where it would affect the Fed," said Stanley.
Winding down QE has been the topic of much angst in global markets since the Fed first suggested a pullback in its $85 billion monthly purchases in early May. U.S. bond yields have risen and stocks, while still higher, have struggled against rising interest rates. The 10-year went from a low of 1.61 percent in May to above 3 percent in late trading Thursday. The rise in U.S. rates has sent ripples around the world, with a painful exodus of capital from emerging markets and higher bond yields globally.
"The winds have changed here. Economic data is picking up some. Once the Fed started talking about reducing purchases that was a real thing to the market," said Brian Edmonds, head of interest rate trading at Cantor Fitzgerald. "It looks like we will continue to see pressure on rates. What would put the genie back in the bottle , that would be much weaker data."
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But the data is not weakening or strengthening in any consistent fashion. Durable goods and industrial production have been weaker than expected, but the four-week average for jobless claims is at a six-year low. This week's ISM data for manufacturing and services was much better than expected, and that encouraged traders to expect a stronger-than-consensus jobs report.
ISM manufacturing data showed the strongest expansion in two years in August, and ISM services data on Thursday jumped to the highest level in nearly eight years and the employment component of the index was at a six-month high. Stocks gained slightly on the report, but bond yields made a major move Thursday, with the 10-year yield at its highest level since July 2011. The bias in the bond market is towards selling, and there are expected to be continued redemptions.
"I think there's a reasonable amount of optimism built in for the employment report," said Ian Lyngen, senior Treasury strategist at CRT Capital. He said 3 percent is a key zone for the market.
"That will be quite a battleground. Given how elevated flows are now and given the psychological impact of 3 percent as opposed to the high 2s, I think you will see people in there defending that level and people pushing it as well. It should prove itself a meaningful technical test." Lyngen said a jobs report over 200,000 could easily drive the 10-year to 3.08, 3.10 percent. "The average move for nonfarm payroll day is 12 basis points." A weak number, on the other hand, could bring in some buyers.
Besides the ISM data, traders were also expecting a better than consensus number after ADP's private sector employment report Thursday showed job gains of 176,000.