Waiting on a Cut

The markets will look for Friday's November employment report to seal the Federal Reserve's fate with a cut on Dec. 11.

Rescue fantasies, ranging from a government-led bailout for mortgage borrowers to Middle East investors injecting liquidity into troubled banks like CitigroupC, overshadowed still-illiquid credit markets last week to spawn a stock market rebound.

After a 331-point rally Wednesday, the Dow Jones Industrial Average's rally grew more tentative as expectations for an economic slowdown gathered steam. The Dow gained just 22 points on Thursday, and tacked on 60 Friday.

To sustain the positive momentum, the markets likely need yet another refill of the punch bowl from the Fed.

"The bond market is begging for rate cuts, while the stock market is expecting rate cuts," says Randy Diamond, trader at Miller Tabak. He adds that the upcoming week's jobs data are likely to reveal how aggressive the Fed may be with its rate cuts, rather than whether or not it will cut rates.

The fed funds futures market prices in 100% odds of a 25-basis-point rate cut on Dec. 11, the next scheduled meeting of the rate-setting Federal Open Market Committee, and still less than 50% odds of a 50-basis point rate cut. The Fed has cut rates 75 basis points over the past two meetings of the committee.

Even Fed Chairman Ben Bernanke admitted in his speech Thursday that he's looking closely at incoming signals about "employment and wages" to assess the economy's need for rate cuts.

Most analysts took the chairman's speech as a green light for the Fed to ease in December. The chairman downplayed the risks of inflation, and noted that the housing market, high gasoline prices, declining stock prices and tighter lending standards "seem likely to create some headwinds for the consumer in the months ahead."

The consensus of analysts expect the Bureau of Labor Statistics will report the economy added 75,000 jobs in the month of November, marking a slip from reports of 166,000 in October, and more than 90,000 in each month since July.

The market will have other clues on employment next week prior to Friday's nonfarm payrolls report as well. Wednesday, analysts expect the ADP National Employment report, which measures private company payroll growth, excluding government jobs, to show a 50,000 addition in November.

Also, the Institute for Supply Management's reports on both manufacturing and service sector economic activity come out Monday and Wednesday, respectively. Analysts expect the manufacturing report to slip for the fourth consecutive month to a reading of 50.5, from 50.9 in October. A reading under 50 represents contraction in the sector.

Deutsche Bank's chief U.S. economist Joe Lavorgna believes the jobs market would have to contract for the Fed to cut 50 basis points. Thus far this year, there was only one negative jobs report -- a 4,000-job decline in August that was subsequently revised to a gain of 93,000 jobs. Drilling down, retail and good-producing jobs have been declining for the past three and four months, respectively.

There is little direct Fedspeak next week, with San Francisco Fed President Janet Yellen and Boston Fed President Eric Rosengren both slated to talk Monday.

As the markets clasp onto rate-cut hopes, the credit markets will remain mired in their balance sheet swamps. If last week taught investors anything, it's that the pricing of illiquid mortgage-backed securities remains a guessing game at best.

Wells FargoWFC reported a $1.4 billion writedown based on $11.9 billion of its loan portfolio. And, credit-oriented hedge fund Citadel Investment Group swooped in to buy a large stake in E*TradeETFC, noting that it valued the firm's mortgage portfolio at about 27 cents on the dollar.

But some analysts questioned both events. On Wells' side, some analysts not only wondered whether the bank wrote down enough of its loans, but they wondered at what price level, and how did they get there. In E*Trade's case, the new-found cash was considered a boon, but some analysts note that potential time bombs remain for the company, given the poor quality of many loans, including home-equity loans and second mortgages.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting