Wall Street's bears have the upper hand ahead of Friday's September jobs report.
Stocks kicked off the fourth quarter Thursday with a sell off that has some traders saying the much-awaited shake out has begun for a market that has gained 50 percent since early March. In the worst day since July 2, the Dow lost 2.1 percent to 9509 and the S&P 500 lost 2.6 percent to 1029.
A lot has been hanging on Friday's jobs report, expected to show a decline in September of about 200,000 non-farm payrolls and an unemployment rate of 9.8 percent. However, prominent Goldman Sachs economist Jan Hatzius now thinks that number may be worse than previous expected and he revised his forecast Thursday, rattling an already jumpy stock market.
"What's happening is the economic data is turning weak again, and people are saying, 'here's the W,' said Art Cashin, director of floor operations at UBS.
As stocks sold off, commodities also went south, but the dollar gained against a basket of currencies. "The dollar being so oversold, is bouncing up again. It's not the main reason, but it's a factor" in the market sell off, Cashin said.
Hatzius, Goldman's chief U.S. economist, adjusted his forecast to an expected loss of 250,000 non-farm payrolls, from 200,000, and he maintained his forecast for unemployment at 9.8 percent from August's 9.7 percent.
The change came as stocks were already lower on the latest in a string of worse-than-expected data. Thursday's weekly jobless claims were 551,000, about 30,000 greater than forecast, and the ISM manufacturing data, was still signaling positive growth at 52.6 but was below last month's level and below expectations Consumer confidence earlier in the week was a disappointment, as was Chicago Purchasing data managers Wednesday.
"The incremental information has been on the negative side," Hatzius said in an interview. "The total unemployment benefits, if you include the extended benefits, are still going sideways to higher, at a time that people are even running out of extended benefits."
"Also the consumer confidence survey showed a deterioration in job availability perceptions, and the Monster index was weaker as well," he said.
Hatzius said what he's seeing has not made him change his forecast, and he does not expect a 'W'-shaped recovery, which would require a return to negative GDP. "Big picture, the second half of 2009 should look pretty strong. We think around 3 percent," he said. But for 2010, he sees a slowing to 2 percent growth for the first half and even more modest, 1.5 percent growth in the second half. Hatzius expects unemployment to reach 10.25 percent by the end of 2010.
The dollar drew a lot of chatter Thursday as it moved higher against the euro, the yen and a basket of currencies.
David Gilmore of Foreign Exchange Analytics said comments Thursday morning from Joaquin Almunia, EU economic and monetary affairs commissioner, gave the dollar support against the euro. Almunia is clearly concerned about the currency's move higher and said euro strength will be discussed at the G-7 finance ministers meeting this weekend in Istanbul.
Gilmore said while comments from German and French ministers are sometimes watched more closely, Almunia "is important and demands the market's attention." The comments also follow efforts by Japanese officials to talk down their own rising yen.
"The other story is that G-7 is kind of in flux right now because G-20 is the key body," he said, adding it's unlikely it would issue a communiqué at this point. But he said with EU officials talking about the strong euro and Japan talking down its currency, that in itself could be supportive of the dollar without any action being taken.
"If I had to guess, the U.S. is not nearly as concerned about the decline in the dollar as the Europeans are," he said.
Fed Chairman Ben Bernanke was uncommonly blunt on the dollar Thursday. He was asked about comments from World Bank President Robert Zoellick about risks to the dollar's status as reserve currency because of mounting U.S. debt.
"I agree with two things Mr. Zoellick said. The first is, I believe he said there is no immediate risk to the dollar. It is a relatively long term issue. I also agree with him though that if we don't get our macro house in order that will put the dollar in danger, and the most critical element there is long term fiscal stability,'' Bernanke told a Congressional panel Thursday.
Gilmore said Bernanke's comment addressed the long term concern about the dollar, but he doesn't seem concerned about the currency's weakness short term. He said U.S. officials do not seem worried yet about dollar weakness because foreigners continue to buy U.S. debt and a soft dollar aids U.S. exports.
Traders have been closely watching the market's technicals lately, and especially since last Wednesday, when major indices put in an "outside reversal" on the day of the Fed meeting. An outside reversal is when the market sets a new high but closes at the low of the day.
Since then, traders have been watching for bearish signals. The market's reversal this Tuesday, when stocks failed to rally and closed near the day's low, was one of those signs. The market day made a technical "lower high" that day.
Scott Redler, a technical strategist with T3live.com, said Thursday's market showed more signs of technical weakness. A short-term uptrend of 1042 in the S&P was broken, adding pressure to the market. "This is another breach of what the trend has been," he said. He said the outside reversal last week was a sign to take profits.
Also on CNBC.com:
"It's a little bit of a composure change," Redler said. He said if Friday's jobs data is disappointing, the S&P could drop to at least its 50-day moving average of 1020. He said that level could provide some short-term support, and he might be a buyer there.
"A lot of technical factors are adding up to show that this market is weaker than it's been," he said.
However, he thinks that could be a short-term move and the market could continue to drop. He said the market could find greater support at 970 to 980, a level where he would put longer term capital to work.
What Else to Watch
In addition to jobs data, factory orders are reported at 10 a.m.
It's a big day for Chicago and other cities vying to hose the Olympics in 2016. President Obama travels to Copenhagen where the Olympic city will be announced by the International Olympic committee. Other world leaders will also attend, as Chicago competes with Tokyo, Rio de Janeiro and Madrid.
Speaking of Olympics, NBC Universal, which owns CNBC, was also in the news but not just as Olympics broadcaster.
CNBC's David Faber reports that NBC parent General Electric is in talks about forming a joint venture company with Comcast to hold the entertainment company. Faber's sources say no decision has been made but Comcast is talking about taking the controlling, 51 percent stake in the venture. Both stocks were lower. CNBC is part of NBC Universal.
— Questions? Comments?