Market Insider: Friday Look Ahead

The December jobs report has been hanging over the markets like a dark cloud all week.

Its importance has grown larger by the day as economists ratcheted up their expectations for job losses. The consensus is for a decline of 515,000 non farm payrolls and an unemployment rate of 7 percent, but some are now expecting declines of well over 600,000 when the report is released at 8:30 a.m. Friday.

The employment picture is one of the scarier economic indicators of this recession because it is still unclear where the bottom is and how bad it will become. It is an indicator that can generate its own snowballing effect. If consumers are scared about losing their jobs, they don't spend. If they don't spend, business activity stalls, and companies have no choice but to layoff workers.

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The ADP private sector jobs survey spooked markets Wednesday when it showed job losses could be worse than expected. But also interesting was a report, released Thursday, on small business employment.

The National Federation of Independent Business said the December decline in employment in its economic survey of small businesses was at the highest level in the monthly survey's 35-year history. NFIB said small business has been responsible for 60 to 80 percent of U.S. job growth in the last decade, and now it says more firms plan to reduce employment more than hire.

Small businesses were laying off an average of 0.86 workers per firm, and 26 percent reduced employment by an average 4.2 workers. The NFIB said its small business members average one to nine employees.

Many small businesses are in retail and were hit by the consumer slowdown. "By the time they finished November, it was pretty clear the consumer was not going to ride to the rescue," said William Dunkelberg, NFIB chief economist. "If 80 percent of their costs are people, to save themselves, they have to cut labor."

Dunkelberg said small businesses, more than large corporations, tend to hold onto employees longer in tough times for a couple of reasons. "One is they're really small and it's personal. Two, they're much thinner in terms of man power and staffing, and I think they have a lot more informal cross training so they tend not to let these people go," he said.

Markets Mayhem

After Wednesday's big decline, stocks pedaled sideways with a mixed return Thursday. "I'm kind of surprised they closed close to their highs. You have a great big number coming tomorrow," said one trader, who noted the chain store news released Thursday was enough to keep the market under water. "It was another really slow day and a really slow week."

Traders said it was a positive though that stocks did not close lower after Wednesday's 3 percent selloff in the S&P 500. The S&P 500 held above the important 900 level, rising 3 points to 909. The Dow was off 27 points, at 8742. Wal-mart , a Dow component, fell sharply after it reported weaker than expected sales and lowered its earnings outlook. Nasdaq though was up 1.2 percent, helped by Sears positive earnings forecast and Microsoft .

For Investors

"I think the market acted very well after a tough sell off yesterday. The selloff was healthy. We're backing and filling," said Todd Leone of Cowen.

"The Citibank deal came out and the market rallied a bit," he said. News that Citigroup became the first bank to support a plan to let bankruptcy judges alter mortgages to prevent foreclosures was released during the midafternoon.

Traders offer several scenarios for the market's potential responses to Friday's jobs data. One is that the market is too fragile, and it will react poorly to bad news. Another view is that it reacts well because the bad news is already expected. And thirdly, it springs higher on better than expected news.

Investors will also be watching for earnings guidance Friday, ahead of next week's start to the earnings reporting season. Chevron, after the bell, warned its earnings would be significantly lower.

Credit Thaw

Credit markets, meanwhile, continued to show improvement. Spreads across many parts of the credit market narrowed this week. MKM's Michael Darda pointed out Thursday that the two-year interest rate swap made an important move to a level not seen since the summer of 2007, when the credit crunch began.

"This is important because swap spreads tend to lead other areas of credit as well as other risk assets," he said in a note.

There are other signs of improvement too. The commercial paper market expanded by $83 billion. Corporations continued to tap the debt market, and markets from high yield to commercial mortgages have shown improvement as investors showed a willingness to take on more risk.

Mortgages bonds guaranteed by Freddie Mac and Fannie Mae rebounded Thursday. The Fed disclosed that it had bought $10.2 billion of these bonds this week.

Greg Peters, Morgan Stanley credit strategist, said some of the moves may be too much, too soon.

"They have improved, and it's a real positive sign. I don't' want to discount that by any means. Investment grade indexes are much tighter, but then some of the economically sensitive stuff has really rallied," said Peters. He pointed to big moves in high yield and commercial mortgages and said they may be getting ahead of themselves.

"Given the rally, it's almost like you're pushing the probability of the success of all of these (government) plans to too high a level," he said.

Questions? Comments?