Big Payroll Number Not in Bonds' Interest

Yields could break out if Friday's number tops 250,000.
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With most of the earnings and economic data behind them, traders face one more major indicator before the

Fed

meets next week: Friday's employment report. Lately, the only coherent thing anyone has said in the run-up to the payroll number is that getting it right is nearly impossible.

Once again, estimates vary widely. The closely followed

Bloomberg

consensus calls for 200,000 new jobs created, with the range of 95,000 to 300,000. The unemployment rate is expected to stay at 5%.

Inasmuch as there's been a trend among handicappers this year, it's been toward optimism. In three of the last four months, the consensus has overshot the mark. In June, economists' forecasts were too lofty by 49,000, and they overshot by 112,000 in May and 115,000 in March. In April, economists were below the print by 166,000.

A majority of the recent economic indicators have been a little hotter then expected. One might think that with strong retail sales numbers, a rise in consumer spending, an upturn in manufacturing, and recent blowout auto sales from

Ford

(F) - Get Report

and

General Motors

(GM) - Get Report

, that this month's payroll number would be strong. But there are no guarantees in life.

"The bottom line is we have had a undesirable number of layoff announcements last month, so this sends a signal that corporate America hasn't exactly been in a hiring mode," said Richard Yamarone, chief economist at Argus Research. "There just hasn't been a positive trend in the payroll numbers."

Yamarone also points out that the birth/death statistics are usually lower for July and this also could lead to a lower-than-expected headline number.

On Thursday, the Labor Department said that initial jobless claims fell by 1,000 to 312,000 for the week ended July 30. Economists had expected a gain of 5,000. The four-week moving average now stands at a 317,000.

In other recent economic news, the Institute for Supple Management said its July manufacturing index was 56.6, slightly higher than economists' forecast of 54.0. The reading was 53.8 in June.

With the recently released positive data, some economists aren't looking for any surprises tomorrow.

"I do not think there is much mystery in the payroll number tomorrow. The Fed has already stated their intentions," said Michael Gregory, senior economist at Harriss Nesbitt. "After a couple of lackluster months, we are expecting a strong number of 175,000 new jobs created."

"The equity market has come to terms with the Fed's actions, so an overly strong number will only reinforce what the market has seen from the recent economic indicators and what we should expect for August," Gregory said.

An extremely strong print of 250,000 or more most likely would send equities higher and spur a selloff in bonds. Most traders expect the 10-year to eventually trade through the important 4.42% level, but it would be sooner rather than later on a blowout July number.

A major shortfall in the number would push equities and bond yields lower. A lukewarm number could reinforce "Goldilocks" scenarios and boost stocks.

"The economic numbers that we have seen lately have been a little more firm then economists have been looking for, so it wouldn't surprise me if tomorrow's number comes in around the consensus of 180,000," said Vincent Ambrose, senior trader at Fox Investments. "Heading into tomorrow's action, I am looking to really square my positions away because we could see some volatility."

How the market reacts to the number tomorrow could signal the tone for the rest of the summer.

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