What a Week: Goldilocks Returns

The higher-than-expected 132,000 new jobs in November capped a week filled with relatively strong economic data that offset last week's weak reads on manufacturing and housing.

The payrolls data underscored weakness in housing and manufacturing, showing a 29,000 drop in construction jobs in November, and 15,000 fewer manufacturing jobs. But the report also hammered home the bulls' argument that the weakness isn't bleeding into the rest of the economy. The service sector showed a robust 172,000 increase in new jobs, confirming Tuesday's strong ISM services sector report and putting year-over-year job growth in line with the trend since mid-2004.

"The notion that the Fed is easing monetary policy without the labor market losing serious steam is ridiculous," says Michael Darda, chief economist at MKM Partners.

The fed funds futures market seems to agree, and now prices in only 8% odds of a rate cut in January, down from 14% on Thursday and more than 30% last week, according to Miller Tabak. The market also prices in 32% odds of a cut in March, down from 80% odds a week ago. The futures market still predicts 84% odds of a cut in May, down from 100% Thursday.

Stocks turned up in the afternoon after digesting the jobs data and the University of Michigan's preliminary survey of consumer sentiment, which showed a decline thus far in December. The swing factor was U.S. Treasury Secretary Henry Paulson's comments at about 11:30 a.m. EST, which sparked a rebound in the dollar. The dollar's weakness over the past two weeks has been one catalyst for angst about the U.S. economy.