Markets Watch Build Up to Friday’s Jobs Report

The drum beat to Friday’s March jobs report picks up Wednesday, with the release of ADP’s private sector payrolls and the Challenger layoffs report.

Out of Work
Out of Work

Traders are looking ahead to the government employment report Friday, expected to be the fourth in a row to show 200,000 plus job growth. The ADP report, released at 8:15 a.m. ET Wednesday, is expected to show 200,000 private sector jobs were added in March.

Always a major focus, the monthly employment report is even more important this week, as investors hope it will provide clues as to whether the Fed will end or extend its “operation twist” or undertake yet another round of quantitative easing, or asset purchases. The jobs report is also being released on Good Friday, a day when the stock market will be closed, and bonds and futures trade in shortened sessions.

The Fed’s March meeting minutes disappointed investors Tuesday, when they failed to show a Fed ready to open the taps on a new easing program. Stocks sold off, with the Dow ending down 64 at 13,199. The S&P lost 5 to 1413. Treasurys, meanwhile, also sold off and rates jumped, with the 10-year yielding 2.29 by the end of the day.

Besides the ADP report, there is ISM nonmanufacturing data at 10 a.m. It is expected to decline to 56.9, from 57.3 last month. The European Central Bank also holds its rates meeting Wednesday morning, and ECB President Mario Draghi holds a press briefing before the New York opening bell.

Art Cashin, director of floor operations at UBS, said he is watching Draghi’s comments and the ADP report.

“I think ADP could be a little bit of a mover, depending on where they go. My gut tells me the nonfarm payrolls on Friday might not live up to expectations,” said Cashin.

A weak jobs report would fuel speculation that the Fed could take action at its April meeting, something now seen as unlikely after Tuesday’s Fed minutes. Markets are watching for the Fed’s decision on “operation twist,” a program set to end in June, which involves Fed purchases of longer dated Treasurys and its sale of an equal amount of shorter duration securities.

But the Fed did not show its hand on twist in the March meeting minutes. It also said “a couple” of members said further accommodation could be necessary, as compared to a “few” members saying that in January.

The market has been divided over the chances for more action from the Fed, and it has seesawed in the past month on comments from Fed chairman Ben Bernanke. Early in the month, the markets took his comments that the Fed does not have to ease to mean the Fed had turned more hawkish. Interest rates rose in response, and on the idea that the Fed might even bring forward its timing on rate hikes.

But some softish data, particularly in housing, and more comments last week from Bernanke on the weak jobs market reversed that sentiment, leading some traders to believe the Fed could go forward with easing.

“Having the Fed do all the heavy lifting is not the best thing. What this signals to the market is it’s going to take a really dire turn of the data to have them even potentially do something in April. It really places the emphasis on June,” said George Goncalves, head of Treasury strategy at Nomura Americas.

“If Friday’s number is what it is expected to be, it will allow the Fed to take a wait and see approach. Why would they rush to do more?” he said. Goncalves said if the ADP and the other jobs related data this week comes in as expected, a positive jobs report would already be priced into the market by the time the government report is released Friday.

The Fed meets April 24 and 25, and then not again until June 19.

“I think they’ll bring it (QE) up at the next meeting. I think they’ll bring it up at the June meeting, but I don’t think they’ll do anything. What the June meeting gives them is two extra payroll reports. Two extra chances for things to go awry,” said Michael Feroli, J.P. Morgan economist. Feroli said he does not expect the Fed to carry out another round of QE, and it is likely the Fed just lets operation twist end, as planned.

The FOMC minutes also showed that Fed members were still worried about the economy. They discussed rising oil prices, and they discussed concerns about high unemployment, as well as the recent improvement in the employment picture. But, like Fed Chairman Ben Bernanke, in recent remarks, they questioned whether the improvement was sustainable.

If the Fed does more asset purchases, officials have said it could target the mortgage market to help housing and to drive down rates.

Goncalves said it’s possible QE comes up in June. He said perhaps the Fed would consider doing just half of the $600 billion in asset purchases it did in QE2.

“Will they really let the bond market go cold turkey with no support from the Fed?,” he said. “…If they did a token program of $250 to $300 billion, that’s not really big enough to move the needle but it’s enough to prevent the bond market from getting too tight.”

What Else to Watch

At 9 a.m., Treasury Secretary Tim Geithner speaks in Chicago at the Economic Club of Chicago.

The EIA releases oil and gasoline inventory data at 10:30 a.m. ET.

Monsanto reports earnings before the bell, while Bed Bath and Beyond , Harry Winston Diamonds and Ruby Tuesday report after the bell.

Follow Patti Domm on Twitter: @pattidomm

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