Markets Break for Jobs

"A weaker payrolls print might raise concern among Fed policymakers about the wherewithal of the U.S. consumer to spend at a rate that guarantees sufficient economic growth," says John Lonski, chief economist at Moody's Investors Service. The recent downward revision to wage inflation, or unit labor costs, would also give the Fed a bit more comfort on inflation if it needs to ease.

The fed funds futures market is betting on a slightly stronger-than expected payrolls report and a Fed on pause for some time. The futures market ratcheted back odds of a rate cut in January to 12%, from 16% Wednesday, according to Miller Tabak. The market is pricing in a 46% chance of a cut in March, down from 66%, and 100% odds of a rate cut at the May meeting. Odds of two cuts by May fell sharply, to 12% from 40% Wednesday.

Two other labor reports this week have caused many economists to expect strength in Friday's jobs data. The ADP National Employment Report Wednesday suggests 158,000 new jobs in the month, while Thursday's weekly report of new jobless claims revealed a 34,000 decline -- the biggest one-week drop since early June. But payrolls are notoriously difficult to estimate, especially given the Labor Department's massive revisions of late. Indeed, some Treasury traders reported rumors in the market expecting a revision to October's 4.4% unemployment reading up to 4.6%.