To taper or not taper - traders watch all things jobs for next Fed move

A quality control worker at the Mary Kay Inc. regional distribution facility in Dallas, Texas.
T.J. Kirkpatrick | Bloomberg | Getty Images
A quality control worker at the Mary Kay Inc. regional distribution facility in Dallas, Texas.

Good news on the jobs front Thursday could sour the stock market's early September rally.

ADP's private sector payroll number at 8:15 a.m. and weekly jobless claims at 8:30 a.m. will be watched as key indicators on the employment picture ahead of Friday's August nonfarm payrolls. The Friday jobs report is seen by some traders as make or break for the Fed's decision later this month on whether to taper back its $85 billion monthly bond purchases.

Stocks rose Wednesday, with the Dow up 96 at 14,930 and the S&P 500 up 13 at 1653. The Nasdaq was up 36 at 3649.

"I think the market's still vulnerable to further pull back here," said Andrew Burkly, head of institutional portfolio strategy at Oppenheimer Asset Management. "It's good news is bad news for the stock market here near term. I think that still puts pressure on the market." Stronger economic data and the potential for a Fed tapering of its bond buying has pushed rates higher along the curve.

(Read more: Upbeat Fed outlook suggests QE tapering is near)

"The 10-year is at 2.9 percent. Psychologically, as you get closer to 3 percent, it puts pressure on the market," he said.

The ISM manufacturing survey helped lift yields Monday when it was reported at a surprisingly high 55.7. ISM non-manufacturing data is due for release at 10 a.m. Thursday, and it is expected to come in at 55, weaker than the 56 last month. Economists will be watching the labor component of that number for clues on hiring in August.

ADP is expected to show creation of 178,000 jobs, a rough indicator for the jobs report. Economists are looking for a consensus 180,000 nonfarm payrolls for August and an unemployment rate of 7.4 percent.

Claims are expected to come in at 330,000, just below last week's 331,000, signs of an improving job market. The report is relevant to the jobs report only in that it will tell whether the trend of lower claims is continuing. There is also factory orders at 10 a.m. and chain stores are to report monthly sales.

Rate Watch

As the 10-year Treasury note hovered around 2.9 percent Wednesday, the 2-year rose to 0.47 percent, its highest level since July, 2011. "When the short end is moving like this, you're pricing in rate hikes sooner," said Burkly.

(Read more: Where did earnings go? Profit outlook gets gloomy)

Tom Simons, money market economist at Jefferies, said the 2-year is sensitive to the expectations for Fed tapering but also the ultimate move by the Fed to raise rates, which it is not expected to do until 2015. But uncertainty around who the next Fed chairman will be and the composition of the future Federal Reserve board has also contributed to some selling at the short end.

"We're looking at that point where Obama is going to have to submit his nomination for Fed chairman, and it's looking more and more like Larry Summers. I don't think it's a bargaining chip in the whole Syria debate but it's one more thing on the plate," said Simons.

Simons said a new Fed led by Summers could alter the Fed's current policy on forward rate guidance, and there is speculation that a Summers' Fed may move faster to raise the Fed funds target rate than the time frame that is currently expected.

"We're looking for the October meeting to be when they announce tapering...I 'm thinking now it's starting to matter much less when they decide to taper. It's become evidently clear it's coming at some point," he said.

(Read more: Saving habits backslide as recession's impact fades)

However, Jack Ablin, CIO at BMO Private Bank, and other strategists do see a chance that President Obama backs down on his expected nominee, former Treasury Secretary Summers, opposed by some Democrats in Congress. Fed Vice Chair Janet Yellen had been Wall Street's favorite candidate and was once seen as the front runner by a large margin.

"I think the Syria debate, in my view, probably helps Janet Yellen's chances. He's right to get Congressional votes and he might throw in a chip on that one," said Ablin.

Simons said the board could also change dramatically, and Yellen's seat may become open if she is not named. Besides Bernanke, Fed Gov. Elizabeth Duke has resigned, as has Cleveland Fed President Sandra Pianalto. Fed Gov. Sarah Raskin was named Deputy Treasury Secretary and is also leaving.

As markets adjust to the view the Fed will cut its bond purchases, Ablin said he thinks stocks are starting to tolerate higher yields.

"I think if you look at correlations over the last couple of months, there is a shift and we are now seeing an environment where we have higher stock prices with higher yields. I'm encouraged by that. It probably represents to me a very healthy bond market at the expense of bond holders," he said.

(Read more: Labor outlook: 'It's just a very tough job market')

What Else to Watch

Both the European Central Bank and the Bank of England hold rates meetings Thursday, and will release decisions ahead of the U.S. market open.

Minneapolis Fed President Narayana Kocherlakota speaks at 9 a.m.


President Obama and other leaders of the G20 nations gather in St. Petersburg Thursday. Investors will be watching for any reaction to the President's proposal to strike Syria for using chemical weapons on its citizens. Russia opposes the move. Obama canceled his meeting with Russian President Vladimir Putin in Moscow.

Congress will continue to consider whether to approve the Administration plan for a missile attack on Syria. The Senate Foreign Relations Committee Wednesday approved a resolution for an attack against Syria in retaliation for its use of chemical weapons but it prohibited the use of troops.

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.