October's jobs report could be the defining moment for the markets this week.
Thursday's mini-panic sent stocks reeling, bonds rallying and the
injecting $41 billion of new liquidity into money markets. The selloff hammered home for investors that none of the problems that rocked markets this summer have gone away.
Indeed, many market participants' worst case scenario is starting to materialize as profits wane and financial institutions struggle with bad loans. Meanwhile, the U.S. economy is slowing and there is no end in sight to the most severe period of house-price deflation on record.
The Dow Jones Industrial Average
plunged 2.6% Thursday, with much of the selling focused in the financial sector. A CIBC downgrade of
questioned the health of the giant bank's capital base. Likewise, poor earnings out of mortgage insurer
pummeled that sector along with lenders like
The KBW Banking Index fell to a 52-week low as shares of
each fell over 5%.
Thursday's selloff sets the stage for a strange sight. Analysts believe that employment won't suffer too much when the government posts its latest monthly numbers Friday morning. Yet even a solid gain on the jobs front won't likely ease the market's fears.
Indeed, high levels of employment have been a mystery to many economists throughout the past year, as the U.S. economy has trudged through some slow spots like the first quarter of 2007 without suffering higher unemployment. Even as homebuilders like
ratchet back construction and attempt to unload inventories, other parts of the economy have made up for those job losses.
This surprising labor market strength is part of what kept the Fed sanguine about the housing recession as it lingered on. And, many argue that it's stable employment and income growth that has kept the consumer in the stores and the economy out of recession already.
As a result, traders are on tenterhooks for any clues to how bad things might get.
"If the figure
October non-farm payrolls shows moderate growth, there will be relief that the economy is continuing to expand, which will keep cash flow projections on a positive trajectory," writes Tony Crescenzi, fixed-income strategist at Miller Tabak. "If not, worries about the ability of consumers to withstand current strains combined with its attendant effects on the financial system could make for tough sledding."
The consensus of analyst projections puts October's jobs count of nonfarm payrolls at 80,000 new jobs added. That would be down from September's count of 110,000 new jobs, and near to July and August levels of 89,000 and 93,000, respectively.
The ADP National Employment report, which measures private sector employment, reported Wednesday that 106,000 new jobs were added in the month. The losses came from the goods-producing sector, where 28,000 jobs were eliminated, according to ADP.
Companies tied to the manufacturing and distribution parts of the economy have suffered of late, as
warned of a U.S. economic recession and
said U.S. business is waning. The Dow Jones Transportation Average has not matched gains by other sectors.
While traders may want to see a strong employment report because a stronger economy means better profits, the markets' volatility may not disappear regardless of the number, says John Lonski, chief economist at Moody's Investors Service.
He believes traders are concerned the Fed "could make the same mistake twice, by overstating the underlying vitality of the U.S. economy and under-emphasizing the economic danger of home price deflation," he says.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
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