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Look Ahead: Markets Hanging on US Jobs Report

Markets are hanging on Friday's December employment report, which some economists say could show job growth for the first time in two years.

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AP

Wednesday's data will be a warm up of sorts for the Friday numbers. At 8:15 a.m., ADP releases its employment report, expected to show job losses of 90,000. The number does not typically correlate to the government data, but traders monitor it closely nonetheless. Then the ISM nonmanufacturing survey is released at 10 a.m. and it will be watched, in part, for its jobs component.

The consensus expectation among economists for Friday's employment data is for a loss of 10,000 non farm payrolls. J.P. Morgan and Deutsche Bank economists are among those that expect the jobs number to turn positive for the first time since November, 2007.

Whither Stocks

Stocks meandered Tuesday, after economic data sent a mixed message. Pending home sales fell a disappointing 16 percent, but some auto makers showed surprising sales gains. Ford, for instance, reported a 33 percent jump in December U.S. light vehicle sales and Toyota saw a 32 percent increase. GM, however, saw a 5.7 percent decline.

The big debate in the stock market has been whether the first quarter will change the direction for a bull that has been running since March. Historically, traders watch January's behavior as a gauge for the year.

Steve Massocca, Wedbush Securities managing director, said he believes the trend is in tact for now, but there are areas of risk ahead. He and others also expect a rising market to ultimately bring in individual investors before it peaks. Like others, he sees the market moving higher now, but running into rough patches later in the year.

"At the end of December, there was a spike coming into equities funds," he said, adding investors could also move some of the money in money markets into stocks. As long as the fiscal and monetary stimulus continue, he thinks the environment will be favorable for stocks.

"Most of the economic numbers have come in better than expected. There are some areas of trouble. One of them is home sales. But the auto sales were good, the manufacturing data was good. What makes this market turn around and get in trouble is something that suggests that sustaining stimulus becomes problematic," he said. That would include political efforts to curb the government's deficit spending.

Massocca says other potential risks for the market include excessive depreciation of the dollar and fiscal issues with foreign governments. Among the sovereign issues traders are watching is Greece, which news reports say is expected to be visited by members of the European Commission and European Central Bank Wednesday, ahead of its month end report on its plans to stabilize the economy.

The Dow Tuesday was down 11 at 10,4572, while the S&P was up 3 at 1136. Oil and gold firmed, while the dollar rose against most currencies.

Bonds Bounce

Treasury traders latched on to the negative housing news, as investors pushed bond prices higher. As a result, the yield on the 10-year fell to 3.755 percent and the 2-year slipped to 1.008 percent.

"I think there was a bit of short covering from what went on last week, and people tried to catch the rebound in the market," said John Spinello, Treasury strategist at Jefferies and Co.

Traders will also be watching the 2 p.m. release of minutes from the Fed's last meeting. A Market News report Tuesday morning, quoting unnamed Fed sources, spurred talk in the bond market that the Fed could renew its program to purchase mortgage securities if rates rise too much later in the year.

"It would be hinted in the minutes we're going to see tomorrow, but I don't think we're going to see that," said Spinello. The Fed's program to buy mortgage securities is expected to wind down in March and there is speculation rates could rise as a result.

"I don't think the program winding down would specifically push rates up. It's going to be Treasury supply, a better economy or the job market that's going to concern the Fed about moving rates," he said. Spinello also said it would be a show of confidence in the recovery if the Fed did close down the program, as currently planned.

"I don't think we're going to see that (the program extended) unless things begin to unravel in the markets, and spreads start to widen...I think it will only be done if the Fed thinks it has to do it to protect the market," he said.

He said Treasurys were also moving higher Wednesday on buying related to a flood of new corporate debt issuance Tuesday. About $15 billion was offered Tuesday, including a $4 billion deal from GE Capital.

Corporate issuance was quiet in the last part of December as the year wound down, and the new wave is a sign that companies are looking to get deals done before rates start to move higher and while demand is strong.

In the municipal bond market, there is also some new year's activity with a string of deals hitting the calendar. Peter Delahunt, national sales manager at Raymond James, said he thinks the market in the coming year will be similar to the past year but some of the biggest gains may have been made.

"Municipals are rich relative to their historic norm. Part of that has to do with the the fact that the (Build America Bonds) BAB issuance is taking away from the supply of true tax exempt bonds, and you have the demise of the monoline insurances companies, which has taken away from the high grade, better rated credits. And investors are stretching for yield," he said. "You have these dynamics going on when it's more of the credits are likely to get downgraded than upgraded."

For instance, the 10-year triple A-rated muni is now yielding 3 percent, while the 10-year Treasury is roughly 3.76, an 80 percent premium. "Typically, it's been closer to 85 percent so munis are rich compared to the past 10 years," he said, adding investors can still fare better in munis because of the tax break. Delahunt also said investors may be buying in anticipation of higher tax rates, which would make muni bonds more attractive.

Dollar Dilemma

The dollar gained 0.3 percent against the euro Tuesday, to $1.4368 but it fell nearly a percent against the yen.

Brown Brothers Harriman senior strategist Marc Chandler said he thinks the "risk on" trade will prove to dominate again, now that the new year has begun. In that closely linked trade, investors have been selling dollars and buying risk assets, like stocks and commodities. The trade decoupled in December, and stocks moved higher even as the dollar strengthened.

"It's only the second day of the new year, but I say that's the feel it has. Oil is back up. Gold is back up...There's a heavier tone of the dollar," he said. Oil gained $0.26 per barrel to $81.77, while gold added $0.40 to $1118.10, its third day of gains.

Chandler said the currency market is also hanging on the December employment report. "People won't have much conviction until Friday's jobs data," he said. Chandler expects to see another negative number. "In the last 20 years, only eight times has December jobs data beat November jobs data," he said.

— Questions? Comments? marketinsider@cnbc.