After a triple digit swoon into negative territory, the Dow closed higher, up 80 at 15,040, and the S&P 500 rose to 1622, up 13, recovering after slipping beneath its 50-day moving average at 1605, and bouncing off support in the 1598 area.
Ader said the Treasury market ultimately signals the expectation is for a weak jobs report. "Uncertainty is not something the markets deal with, and they (the Fed) took a central bank approach, and not a market approach," he said. Ader said the Fed may have boxed itself in, creating a market that will now not easily let go of quantitative easing.
"What's going to be the easiest way to get the patient off this drug? Is it cold turkey or is it methadone?" he asked. "Today's action reveals we don't know how to handle this."
Mesirow Financial economist Diane Swonk said its possible the Fed could start to pare back bond purchases starting in September, but she also does not see a growth outlook as rosy as the Fed or some other economists for the second half of the year. "I think the issue is we haven't seen the full effects of the sequester and people have gotten this false sense of security that it's not out there, and the reality is it is out there," she said. "There's going to be job reductions. Some government employment is going to be reduced."
Maki also believes the full impact of the sequester, or automatic spending cuts, have not been felt and he is expecting growth of just two percent for the second half. LaVorgna, however, expects the Fed to taper in September, and he sees the economy improving from the current sluggish sub-2 percent growth in the second quarter.
"The economy is fundamentally healthy. The building blocks for continued growth are there, and that's why the second half of the year should be better," he said. "I think we finally get to the promised land of 3 percent growth." But he expects May's jobs report to be weaker than consensus, at just 125,000, and he notes May has been especially weak for the last several years.
Swonk expects to see 140,000 nonfarm payrolls, and she said the number has become overly important to markets. "In the near term, it will shape market expectations because it's gotten this out-sized weighting and that's unfortunate because the reality is they are taking everything into account. It's not just one number. It's not just one month. The market likes to distill it down to simplicity," she said.
Swonk said the markets have been impacted by uncertainty, due to the dissonance within the Fed, with some officials saying bond purchases should be wound down now and others saying several months of confirming economic data are necessary.
"They're all singing in the chorus about how they don't like fiscal drag…they've all come pretty much in line about that issue. The dissonance is about timing issues and that's what they're going to have to come to consensus on, and most of them thinking it would be nice not to have this much longer. The earliest is September and it's still just calibrating."
Credit Suisse economist Jonathan Basile expects to see 150,000 jobs added in May, and he said if that is the number, the Fed will still talk about tapering since clearly some officials favor it sooner rather than later. "We have to think about what they're tapering. Is it MBS (mortgage-backed securities).Is it Treasurys? Is it both? Does the housing market really need the MBS purchases to receive support. Look what's happening to housing. You have more buyers than sellers and prices are going up. Do the training wheels still need to be on the housing market…with the Fed's MBS purchases?"
Basile said Credit Suisse expects to see tapering, starting in September, with the Fed paring back its purchases of Treasurys to $35 billion and its mortgage purchases to $30 billion a month. Even with tapering, the Fed still has a hefty easing program underway and has more than $3 trillion in securities already on its balance sheet.
But Basile's questions about mortgage-backed purchases highlight an issue on Wall Street, and that is there is little consensus about what the Fed intends to do and what it means for market pricing.
CRT's Ader surveyed market participants Thursday and found they are unclear about what the Fed might do. He said a majority believes the Fed will cut back on Treasury purchases and mortgage purchases equally, but a good number believe it could cut back just on Treasurys and others see it ending just mortgage purchases.
Ader's survey also showed that 76 percent believed tapering would begin this year, but most did not expect it before September. A third thought it would begin in either September or October. "The market is confused in here," he said.