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Market Focus Shifts to Fed Meeting, Jobs Report

Monthly jobs data, a crush of other economic and earnings reports and a two-day Fed meeting set up the coming week as one of the most crucial for the final months of the year.

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Trading is expected to remain volatile as investors close the books on October's record setting double-digit stock market gains, which reversed much of the summer's steep losses. But importantly, investors are turning their attention away from Europe's tortuous sovereign debt drama and back to the U.S. economy, which while sluggish, is showing a little more resilience than economists had expected.

European leaders in the past week finally showed progress toward a plan to enhance their bailout fund and resolve the Greek debt restructuring. They were expected to take the plan to the G-20 leaders meeting in Cannes on Thursday and Friday. The European Central Bank also holds a rates meeting Thursday, the first to be presided over by new ECB President Mario Draghi. Investors will be watching to see if the ECB will tweak interest rates though analysts see that as unlikely.

"With these European clouds clearing, the focus comes right back here to the U.S., and we'll be under the microscope at least through the end of November," said Brian Dolan of Forex.com.

The jobs report, expected to show the addition of 100,000 nonfarm payrolls in October, is the big data point traders are watching, but there is also ISM data on manufacturing and service sector activity. Earnings reports are also expected from major companies like Pfizer and Kraft Foods , and the IPO market is showing signs of life with e-commerce discount site Groupon planning a 30 million share offering.

Fed Ahead

The focus will also be on the Federal Reserve, which holds its second to last meeting of the year Tuesday and Wednesday. On Wednesday, Fed Chairman Ben Bernanke holds a press briefing, just after the Fed releases its afternoon statement.

"My sense is they're actually going to take a deep breath and not do much this time," said Pierpont Securities Chief Economist Stephen Stanley. "They've been very active lately."

However, there is some speculation in the market that the Fed could start up a new quantitative easing program — QE3 . The Fed's last QE program ended in June, and the Fed used it to buy $600 billion Treasury securities in an effort to push investors into riskier assets and keep rates down. But this time, the speculation is that it will focus its purchases on the mortgage market. The Fed is currently engaged in so-called "operation twist," where it sells shorter duration Treasurys and buys an equal amount in the long end, in a bid to drive longer term rates down.

"Here we are just a few weeks into 'twist' and we're already discussing QE3 with mortgages. There's no question the Fed is very antsy right now. The doves on the committee are very eager to keep pushing forward ... to do something until something takes," said Stanley.

Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi, said he thinks the Fed is unhappy with the lack of impact on mortgage pass throughs. "I think it's possible they announce a limited QE," he said, giving it a 60/40 chance.

The Fed is also expected to give an update on the economy, as markets weigh whether the improvements in recent U.S. data can continue and whether the consumer will hold up during the critical holiday shopping season.

On Friday, J.P. Morgan economists raised their fourth-quarter GDP forecast to 2.5 percent from 1 percent, based on some of the better spending and other data inside Thursday's third-quarter GDP report. Third quarter GDP growth, at 2.5 percent, was the best pace in a year. The economists also pointed to the 0.5 percent pickup in consumer spending, reported Friday.

As the consumer spent, however, other data shows income is deteriorating and was down three straight months through September. Consumers also dipped into savings, as the savings rate fell 1.7 percentage points through the third quarter from 5.3 percent in June.

The health of the consumer will be at the forefront in the coming week, as auto makers report sales on Tuesday and chain stores release monthly sales data on Thursday

The employment situation is not expected to show much progress, with unemployment sticking at 9.1 percent. Economists expect the October report to be very similar to the September report, which saw gains of 103,000 payrolls.

"I think we're kind of in limbo. We're neither careening toward a decline in jobs the way it seemed we might have been when the August numbers came out, nor are we getting healthy gains ... We're not going to get the 200,000 — 250,000 numbers soon. We're instead kind of treading water," said Stanley.

Whither Stocks

Stocks roared higher in the past week, with the Dow up more than 3.5 percent at 12,231 and the S&P 500 up 3.8 percent at 1285. The Dow's 12 percent monthly gain puts it on track for the best October since 1987, and the S&P, up more than 13.5 percent, is headed for its best monthly performance since 1974.

"I wouldn't be surprised if over the next week or so, we begin to see some consolidation," said Burt White, chief investment officer with LPL Financial. "The next big milestone would be (this) first week of November where you have payrolls coming out at the end of the week ... and the next milestone after that one is the Super Committee."

The Congressional Super Committee is the bipartisan committee working to find $1.5 trillion in deficit reduction by its Nov. 23 deadline, and analysts worry that the partisan feuding that characterized the debt ceiling negotiations will lead to a weak resolution and then potentially another downgrade of the U.S. credit rating.

White said he expects the market to stumble around the time the Super Committee reports, especially if it does not make a real effort to trim spending and instead relies on spending cuts that were already expected. But he says stocks could then move higher into year end.

Brown Brothers Harriman strategist Andrew Burkly said the market can continue to benefit from improving economic and earnings data if Europe's problems are seen as ring-fenced. But his year end target for the S&P is 1250 and he does not expect much more upside. "We feel like if you haven't gotten in yet, it's a little late to be chasing things," he said. "I don't think we're going to roll over and go back down again. If we're at 1200 to 1250 for the rest of the year, it wouldn't surprise me. 1200 is a pretty good support level. The 50-day is at 1190 and the 200-day is at 1275. I think we'll be pinned between those two levels for the rest of the year."

What to Watch

Monday

Some key earnings: Barclays, CNA Financial, Humana, Honda, Allstate, Anadarko Petroleum, Panasonic

0945 a.m. Chicago PMI (Oct)

1030 a.m. Dallas Fed survey (Oct)

Tuesday

Some key earnings: Pfizer, Archer-Daniels Midland, CME Group, Credit Suisse, Dunkin Brands, Marathon Oil, Thomson Reuters, Williams Cos, Unum Group, JDS Uniphase, Becton Dickinson ,Valero Energy, Nomura Holdings, Dollar Thrifty, FirstEnergy,

Monthly auto sales

First day of two-day FOMC meeting

1000 a.m. ISM manufacturing (Oct)

1000 a.m. Construction spending (Sept)

Wednesday

Some key earnings: AOL, Clorox, Comcast, Sony, Devon Energy, Foster Wheeler, Hyatt Hotels, MasterCard, Molson Coors, Nissan, Molson Coors, Marsh and McLennan, Gamin, El Paso, Transocean, Whole Foods, Prudential Financial, Murphy Oil, Kraft Foods, Hartford Financial, Dendreon

0815 a.m. ADP employment (Oct)

1000 a.m. Housing vacancies

0215 p.m. FOMC statement

Fed Chairman Ben Bernanke holds press briefing after statement

Thursday

Some key earnings: Apache, Cigna, Duke Energy, CVS Caremark, DirecTV, First Solar, Estee Lauder, Frontier Communications, Chesapeake Energy, Sunoco, Starbucks, Sun Power, Mohawk, LinkedIn. CBS, AIG, Unilever

Monthly chain store sales

0830 a.m. Weekly jobless claims

0830 a.m. Productivity and costs (3Q preview)

1000 a.m. ISM nonmanufacturing (Oct)

1000 a.m. Factory orders (Sept)

Friday

Some key earnings: AES Corp, Brookfield Office Properties, Washington Post, Plains Exploration, Windstream

0830 a.m. Employment report (Oct)

Follow Patti Domm on Twitter: @pattidomm

Disclaimer

  • 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.

  • CNBC's Senior Personal Finance Correspondent

  • 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.