Traders will be watching a batch of jobs-related data Wednesday for any sign the June employment number Friday could be better than the mediocre report economists expect.
The consensus forecast is that 165,000 nonfarm payrolls were added in June, down from the 175,000 created in May, according to Reuters data. The employment report also is expected to show a one-tenth decline in the unemployment rate to 7.5 percent.
Wednesday's data includes ADP's private sector payroll report, used as rough guidance for the government report. It is released at 8:15 a.m., and is expected to show that 160,000 private sector jobs were added in June, compared to the 135,000 it reported for May. At 8:30 a.m., there is jobless claims data, and while the weekly number does not overlap with the reporting period for June's job report, the markets watch it as a current gauge of jobs activity.
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There is also the 10 a.m. release of ISM nonmanufacturing data, which will give a read on services sector activity and also a look at jobs in the sector. The ISM manufacturing survey earlier in the week showed the employment index slipped into contraction territory, to 48.7 percent from 50.1 percent in May, and manufacturing is one area in the jobs report where economists expect softness. There is also international trade data at 8:30 a.m.
The data also comes in a holiday-shortened week that is thin on traders, light on volume and impacted by anxiety about the Fed and jobs data, not to mention a number of other cross currents. For instance, worries that Portugal's coalition government is unraveling and concern about the Greek bailout weighed on the euro. An unstable political situation and massive protests in Egypt, and protests disrupting Libya's oil sector drove up oil prices, with WTI crude hitting $100 for the first time in 14 months.
The dollar rose, and investors dumped emerging market assets amid expectations the Fed will move to slow its easing program. Brazil's stock market plunged four percent to its lowest level in more than four years, after weak industrial output data sparked more fears of economic slowdown.
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But the Friday jobs report looms large, since employment data is viewed as a trigger for the Fed's decision-making on whether the economy will be strong enough for it to cut back on its quantitative easing, or its bond purchasing program.
"Certainly my forecast is for more of the same. I've got 160,000 (jobs). There's some talk around about the fact that June numbers tend to undershoot relative to expectations," said Stephen Stanley, chief economist at Pierpont Securities. "That's a fair point, but I would also point out that in some of those instances, the numbers had already slowed down in prior months…We've had some big slowdowns in past years in the spring in payroll growth, but we haven't seen it this time."
Credit Suisse economists Jonathan Basile said he expects to see 150,000 jobs Friday, and he also has been looking at the pattern of weakness in June. "There seems to be a pattern where there's been downside surprises for 10 of the last 13 years," he said. "We haven't had a materially upside surprise since 1999. 150,000 isn't significantly different than where we were two months ago. it's where the short-term trend is. It reinforces the downshift from the beginning of the year. To us, it's another solid month, but it isn't something that gets markets really in a tizzy about imminent tapering."
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The June jobs report is being watched as an important metric for the Fed, which has said it could taper back its bond purchasing program if the data improves enough. It currently is buying $85 billion a month in Treasurys and mortgages.
The Fed, after its last meeting, said it could begin pulling back on bond purchases by the end of the year if the data is strong enough and finish the purchases by the middle of next year. That sent rates shooting higher, stocks reeling and the dollar higher. Rates have stabilized as multiple Fed officials, in an unusually uniform commentary, assured markets that the Fed has no intention to raise short term rates and that its decision on the quantitative easing program will be made on the strength of the economic data.
The tone around the Friday jobs report should be different than it was last month. "This time it's more contained because of the Fed signaling ahead. It's more the timing of tapering rather than the issue of the tapering," said Alan Ruskin, Deutsche Bank G-10 foreign exchange strategist.
Traders say a jobs number around the 150,000 to 175,000 would be fairly neutral to the markets, since it is what is expected and would mean the Fed would proceed with its tapering plans. But a very weak number or a very strong number could bring mixed and volatile reactions since the response of the Fed might be unclear.
Oil will stay in focus Wednesday, after WTI crude jumped above $100 for the first time since May, 2012 in the electronic session Tuesday evening. Crude futures are one market that is keeping regular hours ahead of the fourth of July holiday Thursday. Pit trading closes at 2:30 p.m. ET, and there is EIA oil and gasoline inventory data at 10:30 a.m. and natural gas inventory data at 12 p.m.
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"There was a huge draw down in crude in the API report," said John Kilduff of Again Capital. "It's precisely the prescription for $100 oil." The API report showed a surprising 9.4 million barrel drop in inventories.
On Wednesday, the dollar index strengthened and dollar/yen crossed the psychological mark of 100 again, for the first time in nearly a month. Treasurys traded in a relatively narrow range, with the 10-year at 2.47 percent late in the day. The Dow fell 42 to 14,932and the S&P 500 was off less than a point at 1614.
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"Egypt is definitely the wildcard – the army has issued an ultimatum so the clock is ticking…if we have a geopolitical concern, that could affect oil supply and it's a negative in the near-term until we can ascertain what the issue is." On Tuesday evening, Egyptian President Mohammed Morsi responded to the military's ultimatum that he offer political concessions by saying he would not step down and would stick to "constitutional legitimacy."
"And technically, if the S&P can't push above its 50-day moving average of 1624, that becomes an area of resistance and it means this is a rally that's starting to fade."
Hogan said. "This is the third time we've tested it." The S&P hit 1624 Tuesday morning, before reversing course.