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Thursday Look Ahead: Markets Face Jobless Numbers After Day of Rumors

Several economic reports could break the quiet trading mood Thursday.

Weekly jobless claims, which have moved stubbornly higher for the past two weeks, are reported at 8:30 a.m. Economists expect to see 478,000 claims, down from last week's 484,000. The Philadelphia Fed survey and leading indicators are released at 10 a.m.

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The Congressional Budget Office releases the 2010 budget and economic outlook at 11 a.m. St. Louis Fed President James Bullard speaks at 1 p.m. It was Bullard who stirred up markets recently with his comments that the U.S. could face Japan-style deflation and that the Fed may need to get more aggressive with asset purchases.

A few retailers report earnings, including Sears, Williams Sonoma , Ross Stores and GameStop , before the opening bell. Big for tech this week are the after-the-bell reports, expected from Dell and Hewlett-Packard .

Stocks Wednesday trended higher for a second day, but the move was much more subdued than Tuesday's push higher. The Dow finished up 9 at 10,415, and the S&P 500 was up 1 at 1094. Of the S&P industry sectors, consumer discretionary stocks were the best performers, up 0.9 percent and energy stocks, down 1 percent, were the worst performers.

Takeover rumors bubbled around some names Wednesday, including U.S. Steel , after BHP Billiton's hostile $39 billion bidfor Potash stirred up speculation of more deals in the offing.

U.S. Steel was said to be the target of ArcelorMittal . Neither company would comment, though U.S. Steel shares rose more than 5 percent. Home builder stocks were also among those in the rumor mill, after a Citigroup analyst suggested the sector is ready for consolidation.

While there have not been many huge deals recently, there has been a mild flurry of small acquisitions. John O'Donoghue, who heads the trading desk at Cowen, said that's a good sign for stocks and a first sign of a recovery.

NY Stock Exchange Traders
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NY Stock Exchange Traders

Traders like to see takeover activity because it inspires some confidence in that CEOs are willing to make bets on where their businesses and their targets' businesses are heading. Deal activity also clearly puts a premium into stock prices.

"You're seeing smaller strategic deals that fit in very nicely with the guys how have a lot of cash," he said. "If I'm a CEO and I think the worm is starting to turn, I want to do that sort of thing," he said. O'Donoghue expects the currency volatility to also result in more cross border deals.

While the deal activity is a plus, he expects stocks to be relatively quiet for the rest of the s summer. "Volumes are really, really low. The level of institutional participation is down a lot, and I just think retail America is out of the market. If they're still in, it's through ETFs," he said.

Traders also look at IPO activity and the recent wave of corporate debt issuance as a positive sign for the stock market, since it shows companies can tap the capital markets and are reducing debt costs. General Motors Wednesday made its much anticipated filing for an IPO that could come as early as October.

The dollar was barely changed Wednesday but firmed slightly against the euro . It was flat against the yen . In the Treasury market, the 2-year and 10-year were basically unchanged Wednesday.

Mortgage spreads, however, continued to widen and were at the widest level since June.

"The market is a little panicky because of the refi talk," said John Sprow, chief risk officer at Smith Breeden. "It's just reacting to rumors that somehow the government, through its ownership of Fannie and Freddie, will try to engineer a massive refinancing action to try to put money into people's pockets who need it," he said.

"Whenever you get in to this realm of public policy, it makes people nervous because it doesn't play by the same rules that people in my business are used to playing by."

The idea of a sweeping forced refinancing has circulated for several weeks, but resurfaced Tuesday as the White House held a summit on housing finance, aimed at setting a future course for Fannie Mae and Freddie Mac.

The Treasury has denied such a program is being planned, and Sprow doubts it would happen. "I think it would be incredibly tough to pull that off. I think, like all these things, it would have unintended consequences. The Fed would take a loss, but so would a lot of other people," he said.

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