Market Insider

Good news or bad? Street expecting strong jobs report

Jin Lee | Bloomberg | Getty Images

November's employment report could be good news for the economy but bad news for stocks.

Economists expect to see about 180,000 jobs added in November, off from October's 204,000 level, and the unemployment rate a 10th lower at 7.2 percent.

Traders, however, are discussing higher whisper numbers well above 200,000, and that has been weighing on stocks and sending bond yields higher on speculation a strong number would speed up the timetable on the Fed's wind-down of its quantitative easing program.

A better report would raise the odds the Fed would decide to taper its bond buying program when it meets in December, Fed watchers say. But they still mostly believe tapering of the $85 billion a month program in January or March is more likely. November's employment report is being released at 8:30 a.m. EST Friday.

Former US Labor Secretary: 250,000 jobs needed
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Former US Labor Secretary: 250,000 jobs needed

Charles Schwab's Randy Frederick expects to see a 200,000 plus number and that could create knee-jerk selling in stocks. "I still think there's little chance for the Fed tapering on (Dec.) 18th," said Frederick, managing director of active trading and derivatives. "I do think even if they decided to taper, we wouldn't have a 10 percent pullback. I think it would be more like 4 to 5 percent."

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If nonfarm payrolls are in line with expectations or slightly lower, that would be the best scenario for stocks, he said. However, there could also be some profit-taking, and if the number is very weak, it would startle the market, and the selling would be more about concern for the economy. QE has become a security blanket for stocks, which have been helped by lower longer term yields.

CRT Capital surveyed bond market participants Thursday and found a very low 11 percent expect a December Fed tapering, but the odds are greatest if the jobs number is 258,000 or better. If that happens, they expect 10-year notes to sell off, and yields move toward a 3 percent target, as stocks lose about 2 to 3 percent.

But if the nonfarm payrolls are below 210,000, a December tapering is off the table, and bonds and stocks will rally. The respondents saw 10-year yields returning to the 2.7 to 2.75 percent area and stocks recovering about 1 percent.

Traders became emboldened in their expectation for a higher number after the ADP private sector jobs report showed 215,000 jobs, its best level in a year. Traders also were watching the improvement in jobless claims Thursday, with the four-week average now at 322,250, the lowest level since 2007.

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Friday's jobs report preview
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Friday's jobs report preview

Mark Zandi, chief economist at Moody's Analytics, expects to see 200,000 total nonfarm payrolls. He said there are two technical factors that could impact that number.

An unusually high number of companies answered the survey last month, perhaps because there was an extra week to respond due to the government shutdown. But that could reverse this month.

Zandi also said when Thanksgiving comes late in November, as it did this year, there has been a weaker November jobs number. "Whatever is going on mechanically in those years, every single year October was strong and November weak," he said.

He does not expect the Fed to wind down its bond buying yet. "I think that 200,000 is an unwritten threshold for them. I think if we're consistently north of 200,000 that would be a green light for them to begin tapering," Zandi said. "They'll probably need a couple, three more months to come to the conclusion that this kind of job growth was here to stay and that would probably take them to the March meeting."

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Zandi said the increase in small business hiring in the ADP report gave him some encouragement that the job market is getting stronger. "It's a good sign. If health-care reform is having an impact, it's not showing up clearly in the data. It could be this is a script that's still being written. The employer mandate was delayed by a year," he said, adding that the hiring could be related to the construction cycle.

The last time the monthly job gain at companies with fewer than 50 employees was stronger than the 102,000 gain in November was January 2013 when small companies added 106,000 workers. Small business is a major engine for job growth, with companies with 50 or fewer workers accounting for 51 percent of all jobs. But those companies have accounted for just 43 percent of job growth since job growth resumed in March 2010, he said.

Zandi said jobs will not be the only factor the Fed watches. It will be interested in retail sales as a gauge of the consumer. "As long as we get a 4 to 5 percent holiday sales season, that will be enough for them," he said.

Barclays chief U.S. economist Dean Maki also expects to see 200,000 nonfarm payrolls , and he expects the unemployment rate to fall 0.2 percent to 7.1 percent.

"It's going to be especially interesting to see what the Fed does if we get a 250,000 number, stronger than what we're looking for , and a drop in the unemployment rate," Maki said. "We're not expecting a December taper mainly because Vice Chair [Janet] Yellen, in her confirmation hearing, said that the FOMC wanted to see GDP growth pick up in a way that would suggest strong payroll gains would continue, and 1.5 percent growth in Q4 doesn't look like the signal," he said.

Maki cut his outlook for fourth quarter GDP to 1.5 percent from 2 percent Thursday because of the high impact of inventories on third quarter GDP growth, revised to 3.6 percent from 2.8 percent.

While stocks could have an initial negative reaction, strategists do not foresee a break down in the market, and many strategists see an up year for 2014.

(Read more: Gangbuster! US growth surges, joblessness plunges)

"The bond market knows there's some sort of tapering coming," said Peter Boockvar, chief market strategist at Lindsey Group. "Still a small tapering is meaningless in the context of the printing they are doing."

Boockvar said a small taper would be about $10 billion, and even if the Fed does slow the program it will still have trillions of assets on its balance sheet.

The Fed has also vowed to keep short term interest rates low for a long time, and it is not now expected to start hiking until 2015.

Treasury yields on the long end, however, have risen, with the 10-year reaching 2.86 percent Thursday and traders seeing a path to 3 percent when the Fed signals it is ready to slow its purchases of Treasurys and mortgage-backed securities.

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.