It's all about jobs and rising interest rates in the week ahead—and the two are not unrelated.
The March employment report is released Friday and is expected to show the first real signs of job growth since the recovery began. The consensus forecast is for an increase of about 200,000 non farm payrolls, but some forecasts are for 300,000 and better.
"It's really hold your breath until that number," said Jack Ablin, chief investment officer of Harris Private Bank.
A positive monthly jobs report is basically a given for a stock a market that has risen four weeks in a row and has been higher in six of the last seven weeks. But for the Treasury market, a strong jobs report means more selling pressure, which could trigger a continued rise in interest rates, something stock traders are watching warily.
In the past week, the Dow climbed 1 percent to 10,850 and the S&P 500 rose about 0.6 percent to 1166. Treasurys saw some serious selling in the past week, which took the yield on the 10-year above 3.9 percent. On Friday, the 10-year finished at 3.852 percent, and some Treasury strategists were forecasting that the 10-year's yield may now carve out a new, higher range.
Pimco senior strategist Tony Crescenzi says the 10-year yield could break the key psychological 4 percent level on Friday's jobs report, if the number is strong enough. He said he expects to see a number of 100,000 to 150,000, excluding the impact of the government's temporary hires for the U.S. census. Economists believe those workers could add another 100,000 or more to non farm payrolls in the month of March. However, in June, the census impact turns negative.
"To some extent, the rate rise will be self-correcting. The more rates rise, the more gains in risk assets are tempered. The stock market could falter a bit," said Crescenzi, who doesn't see a rise much above 4 percent for now. "I think as long as the rate rise is not rapid and disorderly the risk assets will handle it in stride."
Greece and other sovereign debt concerns will stay a focus for markets in the coming week, even after the EU and IMF have agreed to a plan to backstop Greek debt. Greece could tap the credit market as early as next week.
Other important data in the week ahead includes auto sales for March and the March ISM Manufacturing survey, both expected to show evidence of a manufacturing rebound when they are reported Thursday. Auto sales, driven by heavy incentives, are expected to come in at a seasonally adjusted annualized sales rate of 12 million units, up 30 percent from last March and more than 40 percent from February.
The ISM should show a slowing delivery rate, a sign that companies need to step up hiring, said Crescenzi. "There's a lot of torque. Companies have to do something. Output is too low, relative to sales," he said.
The irony is that the jobs report, the most anticipated piece of data in weeks, will be reported when most markets are closed for the Good Friday holiday. Stocks markets are completely closed, and the e mini S&P futures trade until 9:15 a.m. Friday, 45 minutes after the release of the 8:30 a.m. report. Other futures markets are open until 11 a.m.
Ablin said he is concerned that jobs data will look almost too strong, with a swift, but temporary snap back over the next couple of months. "I think what happened is they fired too many people in 2008 and 2009, and now we're going to get a bounce back, and investors are going to draw a trend line, and the Fed is going to raise rates," he said.
The immediate outcome of better jobs numbers would be positive for stocks, but become less so if the Fed were to move earlier than expected on rates, he said. Ablin though sees momentum continuing to drive stocks higher for the time being. "I just think higher rates could start slowing things down a bit," he said.
Historically, he said increased hiring follows a rising S&P 500, as managers are emboldened by their stronger stock prices. "If you look at the year over year change in he S&P and then push it out six months, you'll see a high correlation between changes in the unemployment rate," Ablin said.
As bonds sold off this past week, traders debated the cause of the rout, which was non specific. Yet, many said it basically was the result of the federal government's huge borrowing needs. Crescenzi though said the recovery and resulting increase in private demand for credit is also a factor. In recent weeks, corporate bond issuance has been strong and issuance of all stripes has found willing buyers.
Crescenzi said the private demand for credit is a sign of recovery and the competition for capital has increased, helping to drive rates higher in Treasurys. The trillion plus in Treasury issuance this year is also part of the equation. Two Treasury auctions in the past week saw weaker than expected demand. "Now supply matters. It matters when private demand picks up," he said.
"The difference here is there's so much government debt that you can't rule out that sovereign credit risk is a factor," he said. Cresecnzi said he does not believe bonds are about to be sunk in a bear market. "It's clearly somewhat less bullish conditions, but it's not a bear market...there is not meaningful inflation and no downtick in unemployment," he said.
What Else to Watch
Greece received a commitment from EU members and the IMF that they would set up a safety net for the country, providing it standby credits to help it avoid insolvency. The euro was under pressure in the past week until the plan was worked out. For the week, the dollar gained 0.9 percent against he euro and 2.2 percent against the yen.
Boris Schlossberg of GFT Forex said the Greek situation could continue to make markets nervous. "The one thing they wanted was a lower cost of financing, and that's the one thing that's not going to be. It's ultimately a flawed solution for them. The net result is the Greeks are going to be spending more money to finance their debt service instead of spending on social programs," he said.
Other economic data in the week ahead includes personal income and spending Monday. Tuesday releases are the S&P/Case-Shiller home price index and consumer confidence. The ADP employment report, factory orders and Chicago PMI are reported Wednesday. Weekly jobless claims, construction spending and ISM are released Thursday.
The highlight among the week's earnings releases is Research in Motion , reported Wednesday afternoon. Other reports include Apollo Group Monday; Dollar General , Rite Aid and Mosaic Wednesday, and CarMax and Scholastic Thursday.
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