A sampling of any day's stock market reports provides inconsistent and conflicting reasons for a move up or down. One writer says stocks rallied on prospects of a rate cut, while another says stocks rose on evidence of a resilient economy.

Because the

Federal Reserve

doesn't cut rates unless the economy falters, the question is: What does the stock market want: rate cuts or a strong economy?

Turns out it wants both.

"The market wants to have its cake and eat it, too," says Thomas McManus, chief equities strategist at Banc of America Securities. Stock market bulls want a rate cut before the economic slowdown eats up any earnings growth, he says, but they don't want forced rate cuts (emphasize the plural there) based on a sharp decline in economic growth that would leave businesses struggling.

"At current valuations, stocks will suffer more from declining earnings expectations than they would be helped by lower rates," says McManus.

So, stock investors can't really say they don't want rate cuts, but they don't want three -- which is the amount of cuts arguably foretold by the yield on the 10-year Treasury bond. At least, three was the magic number prior to Friday, when the 10-year note fell 16/32 in price following a stronger-than-expected jobs report that prompted fed funds futures to ratchet down expectations for a near-term rate cut. (Treasury yields move in the opposite direction of their price.)

The higher-than-expected 132,000 new jobs in November capped a week filled with relatively strong economic data that offset

last week's weak reads on manufacturing and housing.

The payrolls data underscored weakness in housing and manufacturing, showing a 29,000 drop in construction jobs in November, and 15,000 fewer manufacturing jobs. But the report also hammered home the bulls' argument that the weakness isn't bleeding into the rest of the economy. The service sector showed a robust 172,000 increase in new jobs, confirming Tuesday's strong ISM services sector report and putting year-over-year job growth in line with the trend since mid-2004.

"The notion that the Fed is easing monetary policy without the labor market losing serious steam is ridiculous," says Michael Darda, chief economist at MKM Partners.

The fed funds futures market seems to agree, and now prices in only 8% odds of a rate cut in January, down from 14% on Thursday and more than 30% last week, according to Miller Tabak. The market also prices in 32% odds of a cut in March, down from 80% odds a week ago. The futures market still predicts 84% odds of a cut in May, down from 100% Thursday.

Stocks turned up in the afternoon after digesting the jobs data and the University of Michigan's preliminary survey of consumer sentiment, which showed a decline thus far in December. The swing factor was U.S. Treasury Secretary Henry Paulson's comments at about 11:30 a.m. EST, which sparked a rebound in the dollar. The dollar's weakness over the past two weeks has been one catalyst for angst about the U.S. economy.

Paulson said in a

CNBC

interview that the world won't tolerate China moving slowly to allow its currency to revalue, and like a good Treasury secretary, he reiterated his belief in a strong dollar.

The euro ended the week down 0.8% from last week's levels against the dollar, and the dollar gained 0.9% in the week vs. the yen.

The major stock market averages also gained ground since last Friday. The

Dow Jones Industrial Average

gained 0.2% Friday, and 0.9% for the week, while the

S&P 500

finished up 0.2% Friday and also up 0.9% on the week to close at 1409.93 after reaching a new six-year high at 1414.76 on Tuesday. The

Nasdaq Composite

gained 0.4% Friday, up 1% on the week to close at 2437.36.

Leading the Dow on Friday was a 2.3% gain in shares of

Citigroup

(C) - Get Report

, which marks a new 52-week high. The bank's shares soared on speculation of a restructuring that might include shifts in the executive suite as well as a possible asset sale.

Elsewhere,

Bank of America

(BAC) - Get Report

fell 1.6% on rumors it will acquire

Barclays

(BCS) - Get Report

, which rose 4.4%. The merger scuttlebutt provided a nice bookend to a week that began with news of the

Bank of New York

(BK) - Get Report

-

Mellon Bank

( MEL) merger.

Among other stocks in the news Friday,

Heelys

( HLYS) led a trio of successful IPOs while

Expedia

(EXPE) - Get Report

jumped nearly 10% on its plans to buy back 30 million shares in a modified Dutch auction. On the flip side,

Xilinx

(XLNX) - Get Report

shed 6% after offering soft guidance late Thursday although

National Semi

(NSM)

was able to overcome its own red flag.

Sectorwise, the stock market's tea leaves were hard to read this week as riskier small-cap stocks reached new highs along with so-called defensive sectors like utilities. Year-end maneuvering and performance-chasing could be to blame for the seemingly haphazard market, say strategists. But however investors are playing it, the market shows there still is a strong bid for stocks, says McManus.

The Dow Jones Transportation Average gained a fraction on the week amid a fluctuating oil market, nervous about possible OPEC production cuts at its meeting next week. By Friday afternoon, oil prices were down 2.3% on the week at $62.03 per barrel. The Russell 2000 gained 1.5% on the week, while the Morgan Stanley Cyclical Index finished the week up 1.8%.

The Philadelphia Housing Sector Index ended the week up 1.4%. Hopes for a bottoming following comments from

Toll Brothers

(TOL) - Get Report

and rising mortgage applications trumped an analyst's warning that the stocks have become overvalued having rebounded almost 30% from their lows, and given the risks for the industry in uncertain interest rate environment.

Indeed, the 30-year mortgage rate dipped below 6% in the past week, but it seems unlikely to stay there given the bond market's reaction to November's data. The 30-year bond finished the week yielding 4.66%, up from 4.55% last Friday, while the 10-year note climbed to 4.56% from 4.43% a week ago. The two-year note yielded 4.68% at week-end, up from 4.52% last Friday.

Investors aren't expecting any moves at the final FOMC meeting of the year scheduled for Tuesday. But many are hoping for clues to the Fed's outlook on for the economy given the new data in hand, the bulk of which suggests a soft landing for the economy -- and that Goldilocks hasn't left the building after all.

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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