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Week Ahead: Jobs Data to Direct Markets—and Maybe the Fed

The September jobs report trumps most everything else for markets in the week ahead, and it could have a lingering effect.

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Third-quarter earnings season also kicks off, with Alcoa, the first Dow stock to report, and Pepsico, both reporting Thursday. There is a string of moderately important economic data, and chain stores release monthly sales Thursday.

The recent drama in foreign exchange markets makes the IMF/World Bank meeting in Washington at the end of the week more interesting than usual. Traders are watching for any comments on currency from attendees, after Brazil's Finance minister this past week warned about the potential for currency wars.

The Bank of Japan is slated to meet over the weekend and into Monday, and any policy moves it makes with regard to the yen will be watched closely.

"I think that given the movement in September, October is not going to see as much or as steep an upside move, but we should see upside in October." -Deutsche Bank, Binky Chadha

Friday's jobs report, however, is the big event, and it's more weighty than usual because it could be a critical piece in the Fed's decision making process about further easing. Economists expect to see barely any change in September hiring, with the private sector delivering about 80,000 jobs. They expect total non-farm payrolls to be near zero, when including the loss of temporary government workers.

"That's really the only one (report) that has the potential to move the needle. It feels like, at this point, we're in the mode where theFed has told us they're going to do another round of QE (quantitative easing), unless the data chases them off of it, and so far the data is not doing that," said Stephen Stanley, chief economist at Pierpont Securities.

"The only indicator we get next week that's significant enough to play a role is employment, and I think there's very little chance the employment report will be strong enough to do that," he said.

Stanley expects non-farm payrolls to show a net gain of 20,000 jobs, taking into account the loss of government census workers. He sees the private sector adding 100,000 workers.

Whither Markets

The stock market, fresh off September's sharp gain, was slightly higher Friday, and finished the week barely changed but with mixed results. The Dow was up 30 points for the week to 10,829, and the S&P 500 slid 2 to 1146, just under an important resistance level. The dollar, which has been driving markets, lost 2 percent to the euro in the past week and 1.1 percent to the yen.

As the dollar waffled, commodities prices rose. Gold continued its record setting streak, adding 1.5 percent for the week to $1,316.10 per ounce. Oil gained 6.7 percent to $81.58 per barrel, for its biggest weekly gain since February.

The dollar has been trading lower since the Fed indicated it would consider quantitative easing, which would be a new program of Treasury purchases that in theory would pressure interest rates and add money to the system. Many economists expect the Fed to announce the new program at its November meeting, if economic reports remain soft. The 10-year Treasury notegained in the past week, and as a result, its yield moved lower to 2.528 percent.

Some strategists expect stocks to continue their upward move until at least early November, when midterm elections are held Nov. 2 and the Fed meets Nov. 3.

"I think that given the movement in September, October is not going to see as much or as steep an upside move, but we should see upside in October," said Binky Chadha, Deutsche Bank's chief U.S. equities strategist.

He said the mid-term elections should be a positive for stocks. "The risk-reward is skewed massively to the positive side. In 19 of the last mid-term elections, 18 percent of them delivered positive results for stocks," said Chadha.

"Lack of confidence still prevails"

Chadha also does not think the election outcome is priced in, as some analysts believe. Nor does he think the idea of further Fed easing has moved stocks, which have benefited from the weaker dollar but also an improvement in economic data in September. "The dollar should have moved down without quantitative easing. Quantitative easing and improvement in macro data have pushed the dollar down," he said.

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"QE is one of the risks for the market because basically it's my view there has been very little confidence in the economic recovery for some time now. The lack of confidence still prevails. It's an open question how the market is going to react to the Fed," he said.

Bill Stone, chief investment strategist at PNC Wealth Management, agrees more easing may not be good for stocks, despite the belief by many traders that it has helped. "I almost worry if you get QE, that it's just a sign that the recovery is continuing to flounder and I'm not sure whether that's good for anybody...I'm not sure what I'm going to say if we get it, but I'm not hanging my hat on that as a reason to be positive about anything," he said.

Chadha said while a move to ease by the Fed might be taken negatively, the timing of the election could help the market. "I think the risk will be overwhelmed by the macro of the election," he said.

If Republicans win the House, as many expect, some analysts believe the Democratic Congress will be much less likely to impose new taxes on the wealthy or increase capital gains taxes when they consider extending the expiring Bush tax cuts after the election.

Earnings Central

There is a handful of earnings reports in the coming week, and many analysts had been bracing for fewer positive surprises than last quarter.

"This is the first quarter in three quarters where earnings estimates were lowered, going into the quarter. I think we've had a pretty consistent pattern of having a much bumpier road in the economic calendar than we've had in the corporate news cycle," said Jefferies managing director Art Hogan. "I have a sense that earnings growth is going to be north of the 24 percent we're looking for."

Stone agrees that earnings could be better than expected. "The third quarter wasn't as soft as we were thinking and people lose sight of the fact that 40 percent of the S&P revenues come from overseas," he said.

Chadha, too, sees more upside. "We think the bar is low, and the earnings will beat again. The beat will not be as big but it will be 5 percent," he said. Earnings in the last couple of quarters have averaged 10 percent above estimates.

Other companies reporting this week include Mosaic Monday and Yum Brands on Tuesday.

Earnings from Costco , Monsanto and Marriott are expected Wednesday.

Econorama

Besides the monthly employment report Friday, other jobs-related data this week includes the ADP private sector employment report Wednesday and weekly jobless claims Thursday. The non-manufacturing ISM survey, released Tuesday, is also watched for its jobs component. Other data includes pending home sales and factory orders Monday; consumer credit Thursday and wholesale trade Friday.

Fed Chairman Ben Bernanke holds a town hall with college students in Rhode Island on Monday at 3 p.m.

Questions? Comments? Email us at marketinsider@cnbc.com