November's payrolls number could be the swing vote for the markets' and the

Fed's

outlook on rate cuts and the economy.

Most economists expect the Labor Department's report Friday of new jobs added to print 105,000, up slightly from earlier estimates this week of 100,000. Analysts and economists expect the unemployment rate to climb to 4.6% from 4.4%.

If the report comes in as predicted or stronger, the Fed's hawkish talk and sanguine economic outlook will seem prescient. The conclusion would be that the soft landing for the economy is in play, and that it may not be enough to dampen inflation, making rate cuts unlikely.

A strong labor market means people can count on their income stream and keep spending through the holidays. The dollar would rebound and stocks probably rally, while Treasury bonds would likely sell off, pushing yields to the mid- to upper end of their recent range.

If the labor market shows considerable softening, on the other hand, the Fed may be forced to acknowledge a slightly harder landing for the economy than Chairman Ben Bernanke and other officials have forecast.

The bond market might rally, sending the 10-year note yield back to new lows for the year, while stocks and the dollar likely would suffer, as it would signal the economy is feebler than investors had hoped.

"A weaker payrolls print might raise concern among Fed policymakers about the wherewithal of the U.S. consumer to spend at a rate that guarantees sufficient economic growth," says John Lonski, chief economist at Moody's Investors Service. The recent downward revision to wage inflation, or unit labor costs, would also give the Fed a bit more comfort on inflation if it needs to ease.

The fed funds futures market is betting on a slightly stronger-than expected payrolls report and a Fed on pause for some time. The futures market ratcheted back odds of a rate cut in January to 12%, from 16% Wednesday, according to Miller Tabak. The market is pricing in a 46% chance of a cut in March, down from 66%, and 100% odds of a rate cut at the May meeting. Odds of two cuts by May fell sharply, to 12% from 40% Wednesday.

Two other labor reports this week have caused many economists to expect strength in Friday's jobs data. The ADP National Employment Report Wednesday suggests 158,000 new jobs in the month, while Thursday's weekly report of new jobless claims revealed a 34,000 decline -- the biggest one-week drop since early June. But payrolls are notoriously difficult to estimate, especially given the Labor Department's massive revisions of late. Indeed, some Treasury traders reported rumors in the market expecting a revision to October's 4.4% unemployment reading up to 4.6%.

Ahead of the jobs data, the stock market was weaker Thursday, dragged down by declines in the homebuilder stocks and the energy sector. Bonds were mostly unchanged.

The

Dow Jones Industrial Average

fell 0.3% to close at 12,278.41, while the

S&P 500

slid 0.4% to close at 1407.29 and the

Nasdaq Composite

slid 0.7% to close at 2427.69.

The 30-year Treasury bond slid 4/32 to yield 4.61%, while the 10-year and the two-year notes were unchanged, yielding 4.49% and 4.58%, respectively.

The dollar was relatively strong Thursday against the euro and the yen, despite a 25-basis-point rate hike by the European Central Bank, which brought its overnight borrowing rate to 3.5%. Higher rates in Europe and other countries diminish the attractiveness of the dollar on a relative basis.

Moderating the dollar's fall were slightly less hawkish words from ECB President Jean-Claude Trichet at a news conference Thursday. Trichet upped Europe's growth forecast, but pulled back on inflation expectations and said a rate hike in February is not a foregone conclusion.

The ECB rate hike highlights the current global paradox in which Europe and other economies are worried about overheating growth as the U.S. is in a soft patch. This paradox underscores the dollar's recent weakness, and once again puts more weight on the payrolls report.

"If payrolls fail to give the dollar a boost tomorrow, we see another leg down for the greenback next week," writes Marc Chandler, currency strategist at Brown Brothers Harriman, and

RealMoney.com

contributor.

If payrolls fail to boost the dollar, count on another leg down for stocks, too.

Home for the Holidays

After a dramatic surge since the summer lows, the homebuilders party ended (or at least paused) Thursday. Credit Suisse analyst Ivy Zelman published a report titled, "Not So Fast," and downgrading her rating on the stocks to underweight. Zelman says the stocks are overvalued.

The Philadelphia Housing Sector Index slipped 1.1% on the day, while shares of homebuilders such as

Meritage

(MTH) - Get Report

,

Ryland

(RYL)

,

Hovnanian

(HOV) - Get Report

,

Toll Brothers

(TOL) - Get Report

, and

Pulte Homes

(PHM) - Get Report

fell between 2.3% and 3.5%.

Energy stocks also slid, even though crude oil rebounded to close up 0.7% at $62.62 on the day. The

Oil Services HOLDRs

(OIH) - Get Report

fell 0.9% Thursday, as shares of

Halliburton

(HAL) - Get Report

and

Exxon Mobil

(XOM) - Get Report

slid 0.8%.

Among other stocks in the news:

  • Home Depot (HD) - Get Report fell 2.5% after it reported $200 million in unrecorded stock-option expenses over a 25-year period.
  • Corning (GLW) - Get Report reiterated its fourth-quarter outlook but fell 3.8% amid concerns of a glut of LCD panels.
  • Eli Lilly (LLY) - Get Report dipped 1.6% after offering 2007 guidance below consensus, while Vanda Pharmaceutical (VNDA) - Get Report soared 69% after it said its treatment for schizophrenia was effective in a late-stage clinical trial.
  • Hershey (HSY) - Get Report fell 3.4% after cutting its 2006 outlook, while Apple (AAPL) - Get Report shed 3.1% amid chatter about a possible delay in the launch of an iPod phone.
  • Research In Motion( RIMM) lost 4.9% following downgrades at RBC Capital Markets and Morgan Keegan.

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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