What the market expects on Big Jobs Friday

Wall Street's obsession with job creation and growth is very real because without real job growth, overall economic growth is likely to be limited no matter what else is happening in the economy. And given that we are now five years into this supposed recovery, we need to see consistency and strength in Friday's report on job growth in May.

Traders work on the floor of the New York Stock Exchange on April 22, 2014
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Traders work on the floor of the New York Stock Exchange on April 22, 2014

Investors/traders will take a positive report as a sign that growth is on track — this will be good for stocks and bad for bonds. First, a strong report will give the Federal Reserve cover on the interest-rate conversation as investors try to surmise timing and pace of interest-rate increases. Will it be sooner than expected? The slightest hint that the Fed may begin to raise rates would cause Treasury yields to rise and prices to fall – the same is true for other members of the bond market such as municipal bonds, mortgage-backed securities, and higher-quality corporate bonds. Second, stronger growth raises the likelihood of increasing inflation and since higher inflation eats away at bond prices, the prospect of rising price pressures is also a negative for bonds.

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At this point in the recovery, traders aren't focused on whether jobs were added, but rather how the result compares to market expectations. Last month, the expectation was for 210,000 jobs to be created - a strong number, but when the actual report detailed some 288,000 jobs created, the market and traders reacted to the surprise increase of 78,000 jobs that had not been expected.

This Friday, the consensus is for 218,000 jobs to be added to nonfarm payrolls, according to analysts polled by Reuters. I do not expect that to be the case. My gut says we see a number just below 200,000. Traders will once again be sensitive to any deviation from the expectation.

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One component of the jobs report to watch is the quality of jobs created vs. the quantity of jobs. A strong headline number means less if the jobs created are low wage/temporary further clouding the strength of the recovery. Conversely, if the quality of the jobs created are full-time and well paid, then the market will react in kind and reward investors.

An important point is that no one wants to see are increases that occur too quickly, which could then be perceived as a negative because it will raise concerns about increasing inflation — a negative for stocks. Now remember, last month we saw an increase of 288,000 jobs, which some economists explained could be a one-off due to pent-up demand from the cold winter, something that wouldn't likely happen in the next report. Traders loved it and caused the market to surge completely, buying into that spin.

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The ADP private-sector payrolls report showed 179,000 jobs were added last month, short of the 215,000 expected but the market discounted this...why? Well, like the Labor Department's reading on nonfarm payrolls, analysts will average out three months so they get more of a trend. By doing so, we still have a number closer to 220,000 private-sector jobs created over that time span.

The same will be true for nonfarm payrolls — We would have to see a number like 160,000 jobs created to bring the three-month average below 200,000. This won't happen. So, if I am right, even a report that shows 190,000 jobs created this month will still give us a trend of 225,000 jobs. This will not cause investors to change their outlook. A trend of +220,000 jobs is what is expected so in fact do not be surprised if you see a 'buy the rumor/SELL the news event. A pullback on the S&P 500 to the 1900 level would not be a surprise.

Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.