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Week Ahead: Markets Turn Focus Back to Economy and Jobs

Barring new shocks, investors will turn their attention to U.S. economic data in the coming week, including the important March jobs report on Friday.

"I think it's kind of interesting that all the negative overhangs still seem to be there, but the market's been resilient, bouncing back pretty quickly." -Brown Brothers Harriman, Andrew Burkly

Stocks in the past week bounded higher, erasing much of the roughly 6 percent loss since late February, when investors began to trade on fears about Libya and broader Middle East unrest. The Dow was up 3 percent to 12,220, and the S&P 500 jumped 2.7 percent to 1313, while the Nasdaq and Russell 2000 were both up 3.7 percent for the week.

The dollar lost about 0.4 percent against the euro, but gained nearly a percent against the yen which began to reflect more concern about the condition of the Japanese economy following the earthquake and nuclear disaster. Oil added another 3.5 percent this week, ending at $105.40 per barrel.

"Actually, for the first time in a while, I think the U.S. data is going to be very important," said Jens Nordvig, global head of G-10 currency strategy at Nomura Securities. Nordvig said the market began to refocus for the first time in recent weeks on talk of when the Fed might end its extraordinary easing program. That speculation in part was prompted by comments from a series of Fed speakers Friday and an announcement by the Fed that it would start to hold media briefings four times a year.

Winston Davidian | Photodisc | Getty Images

There are more than a half dozen Fed officials speaking in the coming week, but the big focus is on the March employment report.

Economists expect that the March payrolls will show the economy added just about 200,000 new jobs, up slightly from 192,000 last month.

In the coming week, traders expect a positive bias in the stock market as investors make portfolio adjustments ahead of the end of the first quarter on Thursday. Besides the jobs report, auto sales are reported Friday, as is a key manufacturing survey from the Institute of Supply Management.

"I think it's kind of interesting that all the negative overhangs still seem to be there, but the market's been resilient, bouncing back pretty quickly," said Andrew Burkly, director of equity strategy research at Brown Brothers Harriman. Burkly does not expect the market's gains to be great this year, and he has been expecting the S&P 500 to criss-cross the 1300 level several times before ending the year at 1350.

"We've been using the third-year market as our base case and basically third-year bull markets are muted. They tend to be in the 3- to 5-percent range," he said.

Energy stocks and tech were the best performers of the week, up 4 percent. The energy sector has followed the nearly 15 percent rise in oil, and it is up about 14.7 percent for the year-to-date, double the next best performing industrial sector. Tech is up just 3.2 percent year-to-date.

Burkly said an area of concern for the market could become the outperformance of energy stocks, rising as oil's sharp move higher could start to pinch the economy and stock market. "The longer energy stays a dominant outperformer, I think that's going to weigh on the other groups as time goes by," he said. "There's too much dispersion. Not everything is participating."

The rising price of oil did not hold back stocks in the past week, but it is a top area of concern among analysts and economists.

"I think one of the things driving the market over the last couple months is the idea that the economic reports are coming in better than expected," said Burkly, noting this past week's durable goods report was a surprising negative. "If you start to see a trend where the numbers are disappointing, that could affect the market."

Goldman Sachs stock strategists, in a note Friday, said they believe investors are questioning the U.S. growth outlook due to the combination of macro event risk and a "soft patch" in economic data. "Growth worries have manifested themselves in recent equity performance. Growth-based investment strategies have paused after a five-month run of strong outperformance and we estimate equity investors reduced their view of US GDP growth by 40 bp from mid-February to mid-March," they noted.

But the Goldman strategists recommend keeping growth-sensitive stocks and they expect macro economic data this week to remain strong.

The stock market's spring back from its lows of the year on March 16 has been quick, even in the face of the conflict in Libya, Japan's problems and a budget and political crisis in Portugal. The S&P 500 was down 6.4 percent from its Feb. 18 peak through its March 16 trough, and it has rebounded 4.8 percent.

Big Movement on the VIX

At the same time, the VIX , which moved sharply higher in February and early March, gave back 39 percent of its gains since March 16. The VIX is the CBOE's volatility index and was at 17.91 Friday.

"You could use it as a confidence indicator to some extent," said Dan Deming, who trades the VIX at the CBOE. "I would not say it's the end all and be all of indicators. There's no question the market is springing back, that all of these indexes are coming back through their 50-day moving averages." He pointed to the S&P 500, the Semiconductor Holders Trust SMH and the iShares Russell 2000 ETF (IWM).

Traders have also begun looking forward to the coming earnings season and the impact of big events, like the Japanese earthquake and the rise in energy prices. Burkly said he expects to see margins hold up and the impact from rising input costs should not kick in until the third and fourth quarter.

There are few earnings expected in the coming week, but Family Dollar Stores reports Wednesday.

Econorama

There is a heavy dose of economic news, even before Friday's jobs report. "The good news is the jobs market is improving. The bad news is there's still not a 300,000 number that tells you the trend shouldn't weaken," said Deutsche Bank Chief U.S. Economist Joseph LaVorgna. He expects to see 200,000 jobs were added in March, with 225,000 in the private sector. He expects a further decline in the unemployment rate to 8.8 percent from 8.9 percent.

LaVorgna said jobs should start to improve and noted regional manufacturing surveys are showing much more strength. "It looks like people are still spending, and the labor market is getting better. If you have a few good employment reports, better than what you can see now, you can forget about oil" prices, he said.

JPMorgan economist Michael Feroli said he expects 185,000 jobs were added.

He is also watching auto sales. "We're looking for a little bit of a decline to (annualized selling rate) 13.2 million, which all things considered wouldn't be that bad with how much gas prices have gone up," he said.

Other data includes personal income and spending and pending home sales on Monday. The S&P/Case Shiller home price index and consumer confidence are released Tuesday. The ADP private employment report is issued Wednesday, and weekly jobless claims, Chicago PMI, and factory orders are Thursday. Construction spending is also reported Friday.

Chinese PMI is released Friday morning. There are three Treasury auctions, starting Monday with $35 billion in 2-year notes. Another $35 billion in 5-year notes will be auctioned Tuesday and $29 billion in 7-year notes, on Wednesday.

There are a lot more Fed speakers around in the coming week to add to the market's speculation. Atlanta Fed President Dennis Lockhart, Chicago Fed President Charles Evans, and Boston Fed President Eric Rosengren all speak Monday. St. Louis Fed President James Bullard speaks Tuesday and Wednesday. Kansas City Fed President Thomas Hoenig speaks Wednesday. Richmond Fed President Jeffrey Lacker speaks Thursday, as does Fed Gov. Daniel Tarullo. On Friday. Philadelphia Fed President Charles Plosser and New York Fed President William Dudley both speak.

Fed speakers on Friday stirred up traders with comments about the Fed's so-called quantitative easing program. There was hawkish rate talk from Philadelphia's Plosser, who said the Fed should raise rates and sell the assets from its balance sheet at the same time. Evans said he doesn't see a need for further easing when the Fed's program to buy $600 billion in Treasury securities ends in June, and Lockhart said it would be a "high bar" for the Fed to do more.

Nordvig said the market has not priced in the possibility of an early Fed exit. He said if the data is strong it could feed expectations that the Fed could start tightening earlier than expected. "The probability of an early Fed exit was priced out," he said. "All the survey data was been ignored for a little while. If it continues to come out close to record highs, it is going to start to feed into meaningful speculation that the Fed could boost rates in the early part of 2012."

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

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

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.