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Friday Look Ahead: Markets Brace for Downbeat Jobs Report

Markets are bracing for a not-so-good July jobs report, which should show a continued sluggish recovery in private sector payrolls.

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"Real interest rates are close to their lowest level in 10 years, and the data's just not good, so I don't hold out much hope for payrolls providing an upside surprise," said Barry Knapp, head of equities portfolio strategy at Barclay's Capital.

Economists expect the loss of 65,000 non farm payrolls in July, and an unemployment rate of 9.6 percent, an increase from June's 9.5 percent. About 100,000 private sector jobs are expected to be added, according to economists. The total payroll number is expected to include the loss of more than 100,000 temporary census workers, and the inclusion of a new group of furloughed state and local government workers.

Goldman Sachs expects a loss of 75,000 jobs in total, including the creation of 75,000 private sector positions. J.P. Morgan sees a total loss of 25,000 jobs in total, including the addition of 120,000 new private sector jobs and the loss of 145,000 census workers.

Stocks were slightly lower Thursday, and Treasurys were well bid, ahead of the jobs report. The Dow was down 5 at 10,674, and the S&P 500 was down 1 at 1125. The 10-year yield slipped to 2.916 percent, and the 2-year fell to 0.546 percent. The dollarwas slightly lower against the euro and the yen.

Pimco strategist Tony Crescenzi said in a note that the bond market has been positioning itself for weak employment growth.

"Expectations for subdued gains in employment remain a major influence on the behavior of the rates markets. Put into numbers, the financial markets are largely of the belief that payroll growth, which has increased by about 100k per month thus far this year, will continue to run at or below the roughly 125k-150k level of increase in labor force growth. Many also surmise that labor force growth will exceed levels that would be expected from demographics alone, as there are many people who exited from the labor force because they were pessimistic," he wrote in a quick note Thursday.

The Treasury market has been full of all sorts of buzz ahead of the number, and ahead of next week's Fed meeting. Traders are particularly watching this number for any deeper signs of weakness that might encourage the Fed to alter its statement or reconsider quantitative easing.

"There seems to be more bark than bite to the idea that new actions by the Fed are imminent. At the last Fed meeting in June, the Fed talked more about exiting its accommodative stance rather than expanding it, minutes to that meeting show. Moreover, no hints at possible actions have been given by Fed Chairman Ben Bernanke," according to Crescenzi.

Crescenzi also notes the Fed is not likely to make any moves, but may indicate its future actions depend on the economic data and developments in financial markets. "That said, a weak employment report could push forward the timeline on any actions the Fed might be contemplating," he wrote.

Rumors rippled through the mortgage and Treasury market again Thursday about a new Fannie Mae/Freddie Mac program — this time a forgiveness program for underwater mortgage holders. Treasury denied the rumor, yet speculation keeps cropping up about new programs involving Fannie and Freddie that could result in a refinancing wave. The timing of the rumors may have much to do with the Treasury's Aug. 17 meeting on the future of Fannie and Freddie.

Fannie Mae Thursday reported a loss of $3.1 billion for the second quarter, and asked the government for an additional $1.5 billion, bringing its grand total in government aid to $86 billion.

Chain stores also reported monthly sales Thursday. Thomson Reuters' index showed monthly sales gains of 2.9 percent, below the 3.1 percent expected. Teen retailers were particularly hard hit.

"Certainly, the chain store sales numbers didn't paint a picture of a good back-to-school season," said Knapp.

What Else to Watch

RBS is the last of the big U.K. banks to report earnings Friday. There are just a pair of big U.S. earnings releases. AIG reports ahead of the opening bell, and Berkshire Hathaway reports after the closing bell. Other reports are expected from Brookfield Asset Management, Warner Chilcott, Progress Energy, and Magna International.

So far, 86 percent of the S&P 500 companies have reported earnings. Profits increased this quarter by an average 38 percent, and 76 percent of those companies reporting have beaten earnings estimates. Sixty-eight percent have beaten revenue estimates.

It's worth keeping an eye on grains again Friday, as the talk about global food inflation continues to build. Wheat was moving higher in early Asian trading Friday morning. It rallied to a near two-year high Thursday on news Russia temporarily banned exports due to the impact of drought on its crop.

Brown Brothers Harriman said in a note Thursday that a way to play the wheat story may be through North America's bumper crop and a bet on the Canadian dollar.

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