Market's Steely Gaze Turns to the Jobs Report

With a rate hike looming at the end of August, traders are expecting confirmation but hoping for relief.
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The heat's done nothing to diminish the picket wrapped around the

New York Stock Exchange

, and few dare to cross the line. A few scabs, sure, but most of them are looking to get in, pick up a quick paycheck and skip town.

The buyers are on strike.

Resolution seems unlikely for a while. With the market beginning to think the odds favor a rate hike, many investors don't like the idea of putting money into stocks ahead of the

Federal Open Market Committee

meeting Aug. 24. Add to that plenty of this-year-is-last-year chatter, along with the usual concern about working big blocks of stock in the late-summer doldrums. A fine time to stay away.

Stocks tend to drift lower when buyers leave the market. Said Richard Cripps, chief market strategist at

Legg Mason

, "We're in a trading range with a downward bias to it. The interest-rate picture is going to be murky for the next few months. And the undertone of the market in the short term is fairly negative -- we obviously have flagging volume and declining breadth."

This does not mean that it's going to be a steady decline. Light volume is often a recipe for volatility, so there's a chance the market could get hairy. With the bond market steeling itself for more economic reports in the coming week, things could certainly get hairy. If the data's strong, some are saying a


rate hike is a done deal.

"It seems to me that they've talked themselves into that position," said Neal Soss, chief economist at

Credit Suisse First Boston

. "The data that have already been reported, and the data that we anticipate will, in our judgement, lead them to make a 25-basis-point hike at the next meeting."

The two main reports will be the July

purchasing managers' index

on Monday and the July

employment report

on Friday.

The purchasing managers index has lately signaled a significant recovery in the manufacturing sector, and traders will be looking see if that trend is continuing. They'll also focus on the employment subindices. Manufacturing jobs are high-paying and strength there could indicate wage inflation -- a big worry of the Fed's.

The jobs report will be even more important. Strength in any aspect of it -- job creation, the unemployment rate or wages -- could mean trouble.

"Greenspan is not targeting the American worker

per se

," said Soss. "But there is some kind of dynamic judgment about how much job growth we can afford and still have the same kind of stable environment."

Added Joel Kent, economist at

Lehman Brothers Government Securities

, "Greenspan has put everybody on the watch. He's basically said the size of the labor force is at its threshold."

Though his firm is not forecasting a hike at the August meeting, Kent said negative sentiment has pervaded the Treasury market and it's more likely the bonds will sell off on strong data than rally on good.

Also weighing on the bonds: supply concerns. Wednesday, the


will announce the size of its next quarterly refunding. A new raft of 5-, 10- and 30-year notes and bonds will get auctioned off the following week. Even if the market isn't going to be swamped with more paper than traders expect, bonds typically sell down ahead of auctions as dealers try to force a better entry price.

For all these worries, and despite his belief stocks will chop lower for a while, Cripps thinks that stocks may come out of the week all right.

"I don't think we have a huge downside unless we push interest rates well above the current levels," he said. "And from a short-term standpoint, you are getting some important buy signals from oversold levels. In the next week or so, we should see some pretty good days here."