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Market looking for Goldilocks jobs report

Wall Street wants a ho-hum jobs report, strong enough to show the economy isn't toppling over but not strong enough to pressure the Fed to raise rates any time soon.

Economists expect 190,000 nonfarm payrolls in February's employment report, and the unemployment rate to stay unchanged at 4.9 percent, when the data is released at 8:30 a.m. ET Friday, according to Thomson Reuters. The report comes on the heels of a batch of economic reports that have been better than expected but not stunningly good.

"This stability in markets was going to be dependent on whether the U.S. data continues to hold up. Payrolls is kind of the exclamation mark on the state of the U.S. economy, as of now. I think it does have the ability to entrench the current trends, meaning the rebound (in markets)," said John Briggs, head of strategy at RBS. "If it's lower than expected, I don't think we're going back to the Feb. 11 mentality but it's going to be challenging to the arguments that maybe the Fed should get back on track." Feb. 11 was the day the S&P 500, oil futures and Treasury yields all set lows.

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Trader on the floor of the New York Stock Exchange.

As the recent data, like ISM manufacturing, has shown slight improvements, the expectations for a Fed rate hike have moved up a bit in futures markets. According to Briggs, the markets have moved the chance of a rate hike by December to 85 percent from about 30 percent in the first half of February. The improvement in data also means the fears of a looming recession are fading.

Diane Swonk, founder of DS Economics, said the Fed is unlikely to move at its next meeting, in March, even if the jobs number is super strong. She expects 180,000 jobs, an unchanged unemployment rate and growth in average hourly wages of 2.5 percent over last year.

She also expects two rate hikes this year, to the Fed's forecast for four. The market, however, has ruled out a March hike, in part based on comments from Fed officials that they were watching financial conditions and the economy. Swonk expects the next hike in June.

"I still think it's a bit difficult for the Fed to come in in March … I think the Fed's learned its lesson," she said. "I liken the Fed and the markets as a marriage that's having some problems and communication has broken down a bit. The first step in communications is just acknowledging the other person's problems. We saw the Fed turn a deaf ear to the market." The Fed surprised many in the markets when it held off hiking rates in September.

Swonk said that if the economy were to really improve, it would bring the Fed off the sidelines. "We have a 2 percent economy, not a 3 percent economy. A 3 percent economy would get the Fed to move," she said.

"It would be nice if we had a strong enough economy to pressure the Fed to move quickly, but let's face it, we still have a ways to go," she said.