Liz Rappaport
The stock market's two-day rebound faces a crucial test Friday as traders brace for the Labor Department's employment report for July.
Economists expect the report will show about 130,000 new jobs added in the month, and unemployment will remain steady at 4.5%. But the report carries some extra weight now that the rate-cut theory is being priced back into the markets. The yield on the 10-year Treasury bond edged lower to 4.75% Thursday from 4.76% Wednesday. Equity investors also expect credit market turmoil, and rising defaults and mortgage delinquencies will engender some intervention from the Federal Reserve. The fed funds futures market now puts 100% odds on a rate cut by year-end. Hopes for a rate cut have climbed this week amid upheaval in mortgage lenders American Home Mortgage (AHM Quote - Cramer on AHM - Stock Picks) and Accredited Home Lenders (LEND Quote - Cramer on LEND - Stock Picks), problems with a number of hedge funds exposed to mortgage-backed securities, as well as (refuted) rumors about Beazer Homes' (BZH Quote - Cramer on BZH - Stock Picks) solvency. Rate-cut dreams helped traders overcome housing angst Thursday as the Dow Jones Industrial Average closed up 0.8% to 13,463.33. The S&P 500 rose 0.4% to 1472.20 and the Nasdaq Composite gained 0.9% to 2575.98. "After what we've seen in subprime and high-yield and stocks, people think the Fed needs to cut rates," says William Hornbarger, fixed-income strategist at A.G. Edwards. Hornbarger believes the Fed is likely to cut in December, but not to rescue the markets. He believes core inflation will continue to fall into the Fed's 1% to 2% comfort zone, and that will elicit a rate cut.
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