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Markets to Focus on US Jobs, Economy as 2012 Begins

Markets start the New Year with a fresh wave of reports on the U.S. economy and that could temporarily help turn the focus away from Europe.

Wall Street sign
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Wall Street sign

December’s employment report is the most important, but there are also critical December sales reports from chain stores and auto makers. There are also ISM surveys for manufacturing and services sectors, which gives a good look at business activity and related hiring.

“The employment report comes out Friday and everything else takes a back seat to that,” said Dan Greenhaus, global market strategist at BTIG. “It’s always the most important indicator from an economic standpoint. I would argue it’s even more so because you have a number of indicators suggesting the job market has been picking up, and if that’s the case it’s going to be reflected in the jobs number.”

Stocks limped out of 2011 on a down note Friday. The Dow ended the year with a 5.5 percent gain at 12,217, but the broader S&P 500 and Nasdaq registered their first annual declines since 2008. The S&P’s loss was so teensy, at 0.04 of a point, that it registered flat at 1257.60. The Nasdaq slumped 1.8 percent for the year to 2605. On a positive, the S&P and Dow, both up more than 11 percent, had their best quarters since 2009.

The challenges of the year ahead will appear almost immediately as investors watch Europe’s sovereign debt auctions and a meeting between the leaders of France and Germany on Jan. 9. Europe’s failure to contain its debt crisis spilled into financial markets in a big way in 2011, and that and slowing growth, pressured world stock markets, many of which suffered double digit losses.

The U.S. data in the coming week will be a test for markets because generally improving U.S. data has been a bright spot. The economy, however, is widely expected to slow from the pace of 3 percent plus growth forecast for the fourth quarter. Goldman Sachs economists, in a note Friday, said they do not expects the fourth quarter’s growth rate to continue and that rising oil prices could act as a brake on growth, as could fiscal policy and Europe. Europe’s impact alone could take 1 percentage point off of U.S. growth in 2012, they said.

But on the other hand, Goldman and some other economists see housing stabilizing and expect that it may bottom in 2012. There is also increasing optimism that companies and small businesses are getting ready to hire again. Goldman economists also expect the Fed to pursue another round of quantitative easing.

But the first big focus of the new year will be the nonfarm payrolls report, expected to show 150,000 jobs were created in December.

Dean Maki, chief U.S. economist at Barclays, expects the jobs report to show that a total 140,000 nonfarm payrolls were added, with layoffs in the public sector offsetting private sector hires of 160,000.

Maki said some of the factors that squeezed U.S. growth this year — higher gasoline prices and the impact of the Japanese earth quake and tsunami — have eased and that should help the hiring picture. He also monitors the VIX, the CBOE’s volatility index, generally seen as a measure of fear. The VIX was at 23.40 Friday but had been above 40 during the summer months. “We find that when the VIX spikes, as it did this summer, that tends to lead to slower job growth,” he said.

January Effect?

Sam Stovall, chief equity strategist at S&P Cap IQ, said the key is to the performance of the stock market in the first five days of the year, usually a positive when new funds come into the market.

“An up first week in the market usually signals an up January and as goes January, so goes the year. Since 1945, whenever the market has been up in January it has been up for the entire year, 88 percent of the time,” he said. The market, for the record, was higher in January 2011.

“I think investors are paying a lot of attention to the first week of the year, and we’re going to have some economic data to help us with that,” he said.

The wild ups and downs of the stock market this past year made it particularly difficult for strategists who forecast yearend targets for the S&P 500.

Citigroup’s chief U.S. equity strategist Tobias Levkovich had a target of 1325 this past year. But he expects stocks to perform better in 2012 and has set a target of 1425. He said uncertainty about the presidential election could be a factor in 2012, and the impact of Europe’s economic downturn on U.S. companies doing business there may also be a factor. Companies may also see margin pressure since commodities prices have come down.

“The domestic economy looks relatively healthy, and relatively is a key word, for several reasons. The primary reasons is by far credit conditions in the U.S. remain very favorable. The Fed has pretty much told us they won’t be raising rates for a while. They‘ve anchored rates at a low point. Corporates have great access to borrowing money at very attractive costs,” he said. “What we have found is credit conditions are the best leading indicator of economic activity. They lead economic activity by about nine months.”

Greenhaus had expected the S&P to reach 1370 in 2011. “I’m going out on a limb here and saying I don’t expect all that much for the index gain. Our basic assumption going into the year is we expect it to be similarly volatile,” he said. “…We think the overriding theme will continue to be uncertainty.”

Greenhaus said the Dow did live up to its track record of scoring a gain in the third year of a presidential term, as it has since 1939. In the fourth year, it’s generally higher for an average gain of 4.78 percent.

He said there’s not much history on a flat performance, such as that of the S&P. “You’re talking out of 100 years, you’re talking about six or seven instances,” he said.

The super low yields in the Treasury marketare another reason stocks could attract new money in the new year. On Friday, the 10 year was yielding 1.878 percent.

Also in the past week, the dollar gained 0.7 percent against the euro. The euro was down 3.2 percent for the last year, and analysts expect it to have a turbulent 2012.

Oil prices, rising recently on a renewed focus on geopolitical tensions, slipped 0.85 percent to $98.83 per barrel. But Nymex crude was up 8.2 percent. Natural gas, meanwhile, was down 5 percent in the past week, falling below $3 per million BTU to $2.9890, its lowest price since September 2009. Natural gas is down 32 percent for the year.

Energy analyst John Kilduff of Again Capital said the $3 level was a key psychological level for natural gas. “The overwhelming supply picture and a lack of early season heating demand enabled the break of $3. Next week’s Arctic blast may give some temporary support but the element of cold weather is already looking to be too little, too late,” he wrote in a quick note.

Tuesday

1000 am ISM manufacturing (Dec)

1000 am Construction spending (Nov)

0200 pm FOMC minutes

Wednesday

December monthly auto sales released by auto industry

1000 am Factory orders (Nov)

Thursday

December monthly chain store sales

0815 am ADP employment (Dec)

0830 am Jobless claims

1000 am ISM nonmanufacturing (Dec)

Friday

0830 am Employment (Dec)

1020 am Boston Fed President Eric Rosengren speaks in Hartford, Conn.

1240 pm Fed Gov. Elizabeth Duke speaks in Richmond, Va. on the economy and housing

0100 pm Fed Gov. Sarah Raskin speaks in Baltimore on community banking supervision

Follow Patti Domm 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.

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

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