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Market Needs a Good Jobs Report to Fuel Rally

The February employment report could carry a double whammy for markets and the economy unless it meets high expectations in the week ahead.

The jobs report is Friday, but already traders have flagged it as necessary fuel to take the market higher. Weekly claims data has shown continued improvement in the employment picture for nearly two months, and economists expect that a total 210,000 nonfarm payrolls were added in February, below the 243,000 reported for January.

The direction of oil and gasoline pricesis another big factor for the markets. Oil in the past week rose above $110 per barrel, but slipped back down to under $107 on Friday. Traders are watching any developments related to Iran, and they are very interested in a meeting Monday between President Barack Obama and Israeli Prime Minister Benjamin Netanyahu, who is speaking Monday evening in Washington.

There is also ISM nonmanufacturing data Monday and trade data Friday but the big number is employment.

“Jobs are extremely important for the continuing economic recovery, but I think most people are feeling that that has been getting better already, and that’s probably why the market is doing so well,” said Bill Stone, chief investment strategist at PNC Wealth Management.

Stone and other strategists point to the tight link between employment and the consumer’s ability to cope with rising gasoline prices, which have been racing higher since December. Gas prices reached a national average of $3.74 per gallon Friday, 10 cents higher than a week ago and nearly 30 cents higher than a month ago. Stone noted that the last time gasoline spiked in 2008, there were other negative factors at work against the consumer.

“What you saw was in 2008 when oil spiked you saw claims were going up,” he said. “Now you have a situation where jobless claims are going down as oil is going up … it’s less of a pressure if you’ve got people getting jobs.” He also pointed to a major difference in the price of natural gas, which was four times higher than the current futures price of about $2.50 per million BTUs.

Stocks in the past week hit several key milestones – the Dow closed above 13,000; the S&P 500 closed above 1370, its 2011 high, and the Nasdaq crossed the 3000 mark for the first time since the year 2000. But a worrying sign was the nearly 3 percent decline in the Russell 2000 small cap index in the past week.

The Dow finished the week down 5 points at 12,977, while the S&P was up 3 at 1369, and the Nasdaq was up 12 at 2976.

Dollar Days?

Europe stays in the headlines as markets watch whether private investors decide to accept Greece’s debt restructuring terms by Thursday. Greece’s bailout hinges on the decision, and there is speculation it could result in default.

“The fact there may be a credit event in Greece should not come as a big surprise to anyone,” said Robert Sinche, head of global currency strategy at RBS. He said he expects Greece to default, triggering a credit event, but that the impact will not likely be major for markets as it’s expected.

Sinche said theEuropean Central Bank's liquidity program is likely to keep pressure on interest rates. “We are aggressively shorting the euro up here. We think the positive effect of the liquidity program on the euro has taken place and now we get the actual negative impact ... lowering interest rates through the euro zone,” he said.

That is just one reason he believes the dollar is ready to start moving higher.

“We think we’re at a point where good news for the U.S. economy is good news for the dollar ... not necessarily against commodity currencies but against the euro, the Swiss franc and Sterling,” he said. The dollar was up 1.9 percent against the euro (at 1.32) and 2 percent against the Swiss franc in the past week.

Even though the U.S. economic data were a bit spotty in the past week, with slightly weaker durable goods and ISM manufacturing data, Sinche said the market is no longer hanging on to the idea of another round of quantitative easing. Fed Chairman Ben Bernanke’s Congressional testimony Wednesday and Thursday highlighted continued concern about the economy but he did not give any indication that the Federal Reservehad plans for more easing.

“The market was expecting another dovish surprise and they didn’t get it. I think that was a re-evaluation of his position, and in that context I don’t think we’re at a point now where the markets view everything as being negative for U.S. rates ... I don’t think U.S. rates are going to go up sharply very soon but here is a chance for the euro zone rates to work a little lower,” Sinche said.

“A key for the week is whether we can put in place a third, good 200,000 plus employment number. That should start getting people’s attention ... I don’ think it’s going to be dramatic but I think we’re inching toward the point where good news for the economy is good news for the dollar,” he said.

Sinche noted that, while gasoline prices are rising, so far consumer sentiment is holding up. “The difference this time around is other prices are stable, and really it’s been the oil prices and secondly we didn’t have the growth in wages and salary income,” he said, pointing to gains that showed up in the fourth-quarter GDP revisions this past week.

Oil Drill

Ahead of the meeting with Netanyahu, Obama Friday warned Israel against a pre-emptive strike on Iran. But he also warned Iran it could face an attack from the U.S. if that’s what it takes to stop it from developing a nuclear bomb.

“As president of the United States, I don’t bluff,” said President Obama in an Atlantic magazine interview.

With Europe off the front burner, one of the biggest worries in the markets is that the Iran situation will fan oil prices ever higher, breaking the fragile global recovery.

“We’re going to be focusing on the rhetoric that comes out of Washington,” said John Kilduff of Again Capital. “We’re obviously going to be parsing every word that comes out of that meeting to see what lies ahead for that Iran situation.”

The president speaks to the American Israel Public Affairs Committee conference Sunday morning, while Netanyahu speaks there Monday evening.

Big in the energy world this coming week is the annual five-day CERA Week energy conference, which starts Monday in Houston. Monday’s speakers include Dallas Fed President Richard Fisher.

What Else to Watch

Investors will also be focused on the Super Tuesday primary elections in 10 states, which may help to identify a clear front runner for the GOP nominee to challenge President Obama.

There are two other elections investors are watching.

Polling was held Friday in Iran’s first national vote since the 2009 elections, that led to protests against President Mahmoud Ahmadinejad.

Early results Friday night showed that conservative rivals of Ahmadinejad were elected in many constituencies, suggesting he will face a more difficult relationship with parliament in his remaining two years. Final results are expected by early in the week.

In another election this Sunday, Vladimir Putin was expected to win back the presidency of Russia, despite an active opposition. While he is expected to succeed, Putin will be under pressure to make changes, analysts said.

“The question is how do people react to it,” said Win Thin, senior currency strategist at Brown Brothers Harriman. “I would say if oil prices remain elevated, Putin will keep the fiscal taps open to buy support.”

Monday

1000 am ISM nonmanufacturing

1000 am Factory orders

Wednesday

0815 am ADP employment

0830 am Productivity and costs

0300 pm Consumer credit

Thursday

0830 am Initial claims

Friday

0830 am Employment report (Feb)

0830 am International trade (Jan)

1000 am Wholesale trade (Jan)

Follow Patti Domm on Twitter: @pattidomm

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

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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.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

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

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