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Here's why a weak jobs report really could be a snow job

After being burned by December's miserable jobs number, traders are more than ready to write off any weakness in the January employment report to bad weather.

Yet, markets traded Thursday amid expectations that the number will be in line or easily blamed on weather. Economist expect 185,000 nonfarm payrolls and a steady unemployment rate of 6.7 percent, according to Thomson Reuters.

The extraordinary weakness of December's 74,000 nonfarm payrolls was attributed partly to weather. That number could be revised higher, though not likely anywhere close to the 200,000 originally expected.

A UPS worker makes deliveries Wednesday in Burlington, Vt.
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A UPS worker makes deliveries Wednesday in Burlington, Vt.

"I think people are thinking it's going to be OK because ADP was OK, and I think they think the survey week captured one of the warmer weeks of January," said Peter Boockvar, chief market analyst at the Lindsey Group. ADP reported that 175,000 private sector jobs were added in January, but traders are skeptical, particularly after ADP was over 200,000 in December.

Stocks surged Thursday against the backdrop of improvement in emerging markets and a better U.S. jobless claims report. Other factors were also at play, and analysts pointed to extreme oversold conditions.

The S&P 500 jumped 1.2 percent, to 1,773, closing three points above a very key technical level. Bond yields moved higher, with the 10-year yield back to 2.70 percent.

Boockvar said the move higher could be a "dead cat" bounce, and some traders questioned the stock market jump.

"The risk on trade is going on a little bit here," one trader said. "Our market is ripping higher. It's an oversold bounce for sure. You look at the 10-year and it's not dislocating to the downside that much. It's a little weaker. ... I'd be more willing to trade this rally if the 10-year was at 2.75. You're adding on the dip ahead of a very big number."

(Read more: Investors should beware of these 'global risks')

Diane Swonk, chief economist at Mesirow Financial, expects to see just 130,000 jobs and a drop in hours worked because of cold and snow across the country.

"We've got to get through the hibernation and then defrost," she said, noting the economy should rebound once the extreme weather stops. "I think the underlying labor market is good. We're moving around economic activity. … I think we're going to get all of this back."

Challenger Gray layoff data Thursday was discouraging, as it showed job cuts jumping 47 percent from December. The heaviest layoffs were in retail.

"Retail is hit hard; malls are hit hard," Swonk said. "Chain store sales were terrible. … There was more retail firing than usual. It was exacerbated by the weather. It's also due to deep discounting. These guys don't have any margins anymore. They had a mismatch between where the people were needed and where they were hired."

Retailers hired too many workers for physical stores, she said, when they should have beefed up online operations.

Meanwhile, traders were handicapping how volatile markets could trade around the jobs number, which is an important metric watched by the Federal Reserve as it makes policy decisions.

A very weak number will likely spark speculation the Fed could slow it pullback from the bond- buying program.

Bespoke studied the last 15 times the S&P 500 was up more than 75 basis points before a jobs report. It found that following those days, the market was higher two-thirds of the time and the jobs report was better than expected just half of the time (eight times). The average move for the S&P was a gain of 0.2 percent, but it was up 0.5 percent when the jobs report beat.

(Read more: Markets face Freddy Krueger-like nightmare: Pro)

In the bond market, CRT Capital conducted its monthly survey of bond participants' view on trading the jobs report. Forty-nine percent of respondents expect higher rates as the next move, suggesting that the view is for a possibly stronger report.

But bond strategists also point out that there was no strong bias about the report.

John Briggs, head of cross-asset strategy at RBS, said the market was watching the surge in equities and the calmer behavior of emerging markets.

"When the [European Central Bank] did nothing, you started to see some of these EM currencies weaken," he said. "That was very brief, and ever since that small dip they've been strengthening. ... We're no longer leading. We're following. We're seeing a little bit of a release of flight to quality."

(Read more: Cashin: Why jobs number doesn't scare us)

If the jobs number is good, Briggs added, the first stop for the 10-year yield is 2.85 percent. If the report is weak, rates would move lower.

He said risk markets are now treating good data as a positive and bad data as negative, instead of just keying off what it means for Fed policy.

In addition, he said, market expectations are staying around consensus because traders don't know what to make of the weather impact for January or December.

They are interested in the unemployment rate because, even though the Fed says it's not a trigger, the market treats it like one, he said. The Fed has pointed to a 6.5 percent unemployment rate as the threshold where it might consider raising short-term rates, but officials have stressed that level is not a trigger.

(Read more: Trading volatility in a down market)

"Over the next couple of months, the weather is going to justify and sustain the bear crowd," said Chris Hyzy, CIO of U.S. Trust. "It's going to distort consumer spending. It will distort another month of jobs data. Even though the jobs number tomorrow might be in line or close to consensus, it will be the push of jobs from December into January."

Steve Massocca of Wedbush Securities said the market would take a weak number hard.

"If it's bad the market is going to go down. … We don't know that it's just that the weather is really bad, or is there something more than the weather going on. ... We won't know more until spring on that," he said.

If the number roughs up the markets too much, Massocca expects Fed Chair Janet Yellen to attempt to soothe them in her first testimony before Congress next week.

"I think 150,000 would be good," he said. "I think people are bracing for below 100,000."

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

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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