On Monday, the Market Plays Catch-Up

Wall Street will be digesting the jobs report, Kosovo and the tankan in the coming week.
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So much of what the coming week is about will have already happened when Wall Street makes its groggy way to the desk on Monday morning.

First there's the March

jobs report, the one that came out Friday when the stock market was closed. All in all, it was weaker than people had expected. Nonfarm payrolls grew by only 46,000 against the 166,000 that economists expected. The year-on-year gain in average hourly earnings was a scant 3.6%. The only real sign of strength was the unemployment rate, down to a 29-year low of 4.2% from 4.4% in February. Bonds jumped on the report.

"It was pretty good news," said Mike Cloherty, senior economist at

Credit Suisse First Boston

. "The big thing in there was wages continued to trend lower." The weakness in payrolls was seen as a one-time thing, attributed to seasonal readjustments and inclement weather during the survey week -- already economists are suggesting that they could hop back to 200,000 in April.

It was interesting that the bond market didn't seem too worried about the unemployment rate. Explained Cloherty, "When wages are falling, it's hard to get too worried that the unemployment rate is getting lower. It's such a breakdown of the old Phillips curve stuff. It's just more evidence of how the old models have broken down in the wake of this productivity boom."

Not everyone is as sanguine, however, about the unemployment rate. "That is a nagging thorn in the side of the

Fed

," said Suzanne Rizzo, U.S. economist at

MFR

. "They are not scared of economic growth, but economic growth that entails further pressure on labor market capacity makes them worried."

"Considering the weakness in the bond market, stocks have been holding up well. But I think it's going to be a tough week to go anywhere as long as we're worried about the bonds." -- Peter Canelo, Morgan Stanley Dean Witter

Second on the list of things the market will be reacting to on Monday is the situation in Kosovo. There was, it appeared, a good deal of position squaring in the stock market Wednesday and Thursday ahead of the weekend. Similarly, there was a good deal of nervousness in the Treasury market about getting short in Friday's half-day session. Cloherty compared it to the Asian economic crisis, where nobody knew what kind of flight-to-quality bid might come into the bonds Monday morning.

Yet largely the market has shown a very muted reaction to the crisis in the Balkans, and rightly so, according to Tom Gallagher, senior managing director at the

International Strategy & Investment Group

in Washington. "There will be little impact on U.S. markets as long as it looks like a regional conflict with little spillover effects," he said.

All bets are off if the conflict moves to the ground. "If there's a troop introduction, that's something that has broader implications," said Gallagher. "That would get the market's attention. If Russia were to get more meaningfully involved, if they were to do something that could suggest a greater rupture of the relationship between Russia and the U.S., that would be significant." But Gallagher assigns a low probability to either of these things happening.

The last of the weekend events to affect the market will be Japan's

tankan

, the quarterly read on business sentiment released Monday morning in Tokyo. The tankan, Japan's most closely watched economic report, is expected to show an improvement from the last report, when it reached a post-bubble low.

Poor sentiment is a big part of Japan's problems -- because of dim hopes for the future, people and businesses have hoarded money, rather than spend, hurting the economy even more. A turn in sentiment could set the stage for further rallies in the

Nikkei

. This is not necessarily good in the short run for the U.S. market -- if Japan looks like it's turning, nobody is going to want to miss the ride, and assets could be reallocated to Tokyo. In the long run, however, it would be good for the world economy to be running on more than one piston.

Past Monday morning, it looks like the stock market will be taking its cues from the bonds, says Peter Canelo, U.S. investment strategist at

Morgan Stanley Dean Witter

. Notwithstanding the bump they got from the jobs report, Treasuries have been under a great deal of pressure lately, and that makes it hard for stocks to advance. Past the employment-related pop they may see at the bell on Monday, it will be hard for stocks to make much headway through the week.

"Considering the weakness in the bond market, stocks have been holding up well," said Canelo. "But I think it's going to be a tough week to go anywhere as long as we're worried about the bonds."

But Canelo thinks there's good news in store for stocks. In another week earnings season starts, and he thinks things look pretty good. "We think they're going to come in much better than expected. Excluding energy, we think it's going to be another double-digit quarter." According to

First Call

consensus estimates, energy earnings will fall by 49% from the year-ago quarter, but Canelo points out that the market is paying little attention to these companies' first-quarter earnings and is already handicapping the second quarter. With oil up over 40% from its February low, the energy industry's prospects are not bad.

But the market is in for a slog before the earnings start rolling in. "Earnings, I think, are going to save the day," said Canelo. "But that's not going to help us in the coming week."