Friday's March jobs report can't help but be bad, but the question is whether it will stall the stock market's rally.
For a third day, stocks moved higher Thursday, driven in part by a vote by the Financial Accounting Standards Board to change its mark-to-market rule. The Dow rose 216 points or 2.8 percent to 7978, just under the psychologically important 8,000 level. The S&P 500 jumped 23 points, or 2.9 percent, to 834, and Nasdaq climbed 51, or 3.3 percent to 1602.
Stocks also rallied against the back drop of the G20 meeting in London, where world leaders agreed to financial markets reforms, including oversight of hedge funds, and a greater than expected $1.1 trillion global aid effort.
Financials, the beneficiary of the FASB rule change, rose nearly 3 percent after a 10 percent move in the previous two sessions. The winning sectors though were industrials, up 5.5 percent, and consumer discretionary stocks, up 5.2 percent.
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"You basically have all the catalysts for a nice little rally, and I think the rally has legs, but anything could happen tomorrow," said Michael O'Hare, head of equities trading at LaBranche Financial. O'Hare made his comments ahead of Thursday's closing bell, and he stressed that there's been some significant changes in the type of trading he's seeing.
"Something I've witnessed in the last two weeks that I haven't seen since the summer of '07 is that Wall Street is buying the dips," he said.
He also said there's a healthy rotation under way. "It looks like the financials have run their course for the speculative trade. Now it's back to the stuff that's running the economy," said O'Hare. He pointed to the rotation into industrials, like Deere and Caterpillar , as well as some retail names.
"They're actually buying stocks before earnings are out, and that's a good sign. These are big moves," he said. "Rotation is huge in the psychology of stock traders for the simple fact that they are taking money from one group and putting it into another group of stocks. That's what we're seeing as opposed to people taking money out and burying it in the sand."
"The overall concept is there's confidence back in the tape," he said.
Jobs, Jobs, Jobs
The March jobs report is expected to show that another 670,000 non-farm payrolls were lostin the month, and that the unemployment rate has crept up to 8.5 percent.
Birinyi Associates, in a note, said after the last five job reports, the market has rallied on weaker-than-expected results and sold off on a stronger report. The market is also likely to change direction at 10 a.m.
Deutsche Bank chief U.S. economist Joseph LaVorgna said he expects the numbers to be even worse at 750,000 non-farm payrolls, and unemployment at 8.6 percent. "There are no indications that we have hit bottom in terms of job losses," he said.
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"I think the economy is going to feel better this quarter than last, but that's not to say the economy is growing," said LaVorgna. "... the labor market is bad and companies aren't going to hire. The other thing is banks. They're getting some relief from mark-to-market, but it doesn't do anything about loans and their ability to make new loans. Maybe it gives them some breathing room, but beyond that, you can't say much more."
The mark-to-market rule was criticized because it depended on last sale information and forced banks to take write downs on their hard to move assets. The changes allow banks more flexibility in valuing toxic assets. Citigroup, however, said the FASB decision will have no impact on its financial statements or its existing practices.
As stocks rose Thursday, the dollar tumbled and commodities soared. Emerging markets currencies rallied as G20 agreed to boost IMF funding. Oil jumped 8.8 percent to $52.64 per barrel. Treasurys sold off. The yield on the 10-year rose to 2.753 percent, and the two-year rose to 0.875 percent.
Michael Franzese, who runs the government bond desk at Standard Chartered, said the strength in stocks took the steam out of Treasurys. He said the stock market's gains would have been even bigger if not for a Senate resolution to require the Fed to disclose who it is lending money to.
"This is what happens when you have populist politics ... hopefully it won't stand," Franzese said. Later Thursday, the Senate adopted another non binding resolution, calling for the evaluation of the 12 regional Fed banks around the country. The New York Fed has been in the sights of some in Congress who question its prominent role in overseeing the financial system with no input from Congress on who heads it.
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If Friday's jobs number is very poor, Franzese expects buyers to flood into bonds. If it's very bad, "we may get firmly into that 2.6, 2.58 range (on the 10-year). that'll be the first real resistance. Abhorrently bad, you could get back to that 2.5 level," he said. Franzese said it also became clear Thursday that the Fed is intentionally buying Treasurys in a way designed to drive down rates.
"One of the important things that came out of their buybacks is that they are actually purchasing actives ...You have to look at it strictly as a mechanism to hold down rates, more so than a mechanism to try to provide liquidity into the market."
In addition to the 8:30 a.m. jobs report, ISM non manufacturing data is released at 10 a.m. Fed Chairman Ben Bernanke speaks on the Fed's balance sheet at a Richmond Fed conference at 12 p.m. Fed Vice Chairman Donald Kohn speaks on policies to end the financial crisis and recession at 11 a.m. in Wooster, Ohio.
After-the-bell news from Research in Motion could be a positive at Nasdaq Friday. Research in Motion soared 20 percent after the company beat estimates with profits of $0.90 per share, on revenues of $3.46 billion. The company also said it expects profits in the current quarter to significantly top estimates.
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