Unemployment claims are the big hurdle for markets Thursday, as investors watch to see if economic headwinds will keep the weekly number elevated.
Traders though are first waiting for a 7 a.m. ET announcement from the European Central Bank, which is expected to leave rates unchanged but should signal whether it is going to raise rates in July. ECB President Jean-Claude Trichet speaks right after the meeting.
"At this point, the market is utterly convinced he's going to signal a rate hike in July," said Boris Schlossberg of GFT Forex. "But I think there's a decent outside chance he may hold off. He may demur for another month. When you look at the leading data out of the Euro zone, you're seeing a definite slowdown."
The euro was weaker against the dollar Wednesday, as the greenback strengthened on global slowdown worries. The euro lost 0.8 percent, falling to 1.4684.
"The code word everybody is watching for is 'vigilance.' Vigilance telegraphs to the market that the next meeting in July is going to have a 25 basis point rate hike. The reason we saw this massive sell off in the euro last month was he actually took the word vigilance out of the statement," said Schlossberg. If Trichet signals a rate hike, there could be a big swing up in the euro, barring any new sovereign debt worries, he said.
"Even if he surprises the market to the downside, I don't think the sell off would be as steep as it was last time," said Schlossberg.
Even with the euro falling, some commodities saw strong gains. Oil rose after OPEC failed to reach an agreement on production and supply data showed a larger than expected draw down. Oil on the NYMEX rose $1.65 to $100.74 per barrel. Corn and wheat rallied ahead of the U.S. Department of Agriculture's crop report Thursday morning.
Jobless Claims are reported at 8:30 a.m. and are expected to fall to 415,000, from 422,000 last week, and would now be above 400,000 for two months. International trade is announced at 8:30 a.m., and April's wholesale trade report is at 10 a.m. At 1 p.m., the Treasury auctions $13 billion in reopened 30-year bonds. The Bank of England also meets Thursday but is not expected to take any action.
"I'm looking at unemployment claims. This is the number to me. This has proven to be a real curtain raiser to what we're seeing in the labor front in general," said David Ader, chief Treasury strategist at CRT Capital. Weeks of disappointing jobless claims numbers have been blamed on a variety of factors, including weather, the ripple effect of the Japanese supply chain issues and holidays, but the weakness also showed up in May's employment report which revealed the creation of just 54,000 new jobs.
Treasurys rose Wednesday, and yields fell in an inverse reaction. The 10-year was yielding 2.964 percent. "This is more short covering... I don't think the beige book said anything that would make you feel more pessimistic about the economy or less happy than what (Fed Chairman Ben) Bernanke suggested yesterday," Ader said, adding that the beige book did have some positives, like mentions of continued hiring. The Fed released its beige book on the economy at 2 p.m. Wednesday.
Ader said there is a deepening pessimism about the economy that he is hearing from major institutional investors. "Until a few weeks ago, I was the outlier... I thought there would be tepid growth," he said. But now, he's being told by investors that perhaps a 2-2.5 percent growth forecast is too optimistic. "This has been a pretty dynamic swing in the last six weeks."
Stocks Wednesday tried to shake off losses, but the S&P 500 closed lower in the first six-day losing streak since February, 2009, just before the start of the market turnaround. The S&P finished down 4 to 1,279, its lowest close since March 18, and the Dow ended at 12,048, down 21 points.
Art Cashin, UBS director of floor operations, said the stock market's direction is decidedly unclear. "They're clearly oversold here. They're at levels form which we've had some historic whipsaw turns, but the volume keeps drying up. I can't get my arms around it," he said.
"They tried to get up and move them. They were disappointed with the (Treasury) auction. Then they got disappointed wit the tan book. They didn't see anything to grasp onto. They are still trying to figure out what did Bernanke mean. is he out of bullets? Or is he posturing? He doesn't want to go down as the guy who let the place fall apart," he said.
Bernanke disappointed traders Tuesday when he described a slowing economy but offered no new remedies.
Schlossberg said the markets could soon likely shift focus to the U.S. debt ceiling issues. On Wednesday, Fitch warned it would cut the United States' AAA credit rating if the government misses a bond payment. The pound dropped sharply Wednesday after Moody's warned the U.K. could also lose its AAA credit status if growth continues to slow and the government holds back on fiscal consolidation plans.
"This whole notion that the U.S. and the U.K. are triple A credits are going to come under intense scrutiny. The European interest rate story is what's driving things this week, but the much bigger story could be the whole sovereign debt issue of the U.S. as we move into the dog days of summer," he said.
What Else to Watch
Texas Instruments is a stock to watch after it downgraded its second quarter earnings and revenue forecast late Wednesday. Texas Instruments blamed the changed forecast on lower demand from one wireless customer — Nokia .
Two Fed speakers are on the circuit Thursday, including Philadelphia Fed President Charles Plosser, who speaks at 5 a.m. ET in London an and Fed Vice Chair Janet Yellen, who speaks in Cleveland at 11:30 at a Cleveland Fed policy summit.
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