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"It's almost like we're in between tides. There's a period called slack tide. That's what next week is going to be like," said Art Hogan of Lazard Capital Markets. "We're right in between the tide moving in and the tide moving out, and we don't know what the next environment is going to be. Meanwhile, we're waiting for the most important economic report of the month."
Friday's employment report is crucial to trading in the next couple of weeks, since it is a key metric the Fed watches. The consensus is for 170,000 nonfarm payrolls in June, and the unemployment rate is seen dipping a tenth of a percentage point to 7.5 percent, according to Thomson Reuters. In May, the economy added 175,000 jobs.
Stocks closed out a skittish week with gains, as the bond market stabilized. The S&P 500 was 0.9 percent higher for the week at 1606, but it ended Friday on a sour note, with a loss of six points.
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Bond yields topped out earlier in the week with the 10-year Treasury note, reaching a high of 2.66 percent, before moving back to a range around 2.50 percent. It was at 2.48 percent late Friday.
"It doesn't surprise me at all if we stabilize around 2.50, which is where I think insurance companies and pension funds would come in and scoop up coupon," said BlackRock senior managing director Peter Fisher, who is a member of BlackRock's Global Executive Committee.
Fisher said the trajectory of the 10-year yield will depend on the employment picture and if it improves enough, yields would start to move toward 3 percent between now and year end. "We could rally from here if we see a few weaker employment reports," said Fisher, speaking to the press on his mid-year outlook. He said employment reports will be key to rates.
According to Trim Tabs, investors pulled a record $61.7 billion from bond mutual funds and exchange-traded funds in the month of June, through June 24. Fisher said if the credit market stabilizes those type of flows should not continue. There has been some expectation that investors will become more disillusioned when they open their second quarter broker statements.
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"I think in the last month, we've become very focused on what happens in mid-July," Fisher said, adding that investors will discover the hit to their bond holdings after the Fourth of July holiday.
"They're going to talk to their broker about what to do. They're going to be caught between balancing income and volatility," he said. "I don' think we're going to see massive redemptions out, especially if the bond market is stabilizing at these levels for the next few weeks."
Rates bottomed in early May and then moved higher on improving data, but really ripped higher when Fed Chairman Ben Bernanke indicated after the Fed's last meeting that the Fed could begin to slow its $85 billion in monthly bond purchases before the end of the year and complete the program by the middle of next year.
A flurry of Fed officials this past week were on the speaking circuit, and delivered a more consistent and seemingly more coordinated message to markets than usual. They re-emphasized that cutting back on bond purchases does not mean the Fed will be raising short-term interest rates any time soon. They also said that any plan to cut back on bond purchases would be made based on improvement in the economic data, and several said the markets have misread the Fed's message.
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"I don't think he miscommunicated," Fisher said of Bernanke. "I think they were overly ambitious with what they can do."
New York Fed President William Dudley speaks on regional and national economic conditions in Stamford, Conn. Tuesday at 12:30 p.m.
Besides U.S. data, markets will be watching China's PMI data and Japan's Tankan Survey. On Thursday, U.S. markets are closed for the Fourth of July, but both the Bank of England and European Central Bank meet Thursday.
Citigroup chief equity strategist Tobias Levovich expects the market to continue trading in a bumpy fashion. Levkovich's target for year end on the S&P 500 is 1615, so he does not see much upside immediately , but he sees the S&P above 1825 next year.