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It was deju vu all over again for the stock and bond markets Friday as a weaker-than-expected September jobs report had equities slumping and Treasuries dancing.

Weakness in the economy isn't good for corporate profits but could spur the

Federal Reserve

to scale back its interest rate hikes over the next year, aiding fixed-income securities, or so the thinking goes.

Friday's market was like a minirepeat of Aug. 6, when the July payrolls data were surprisingly weak. Since then, members of the Fed have argued strenuously that the economy was passing through a temporary "soft patch" that would not disrupt the central bank's efforts to raise short-term rates at a measured pace.

The story was holding up pretty well, as the markets just about bottomed around that report, with the

S&P 500

up about 6% since and the

Nasdaq Composite

adding 10%.

Then a big hole opened on Friday when the Labor Department reported that the economy gained just 96,000 jobs in September. The figure was less than forecast and, much more importantly, about 50% less than is needed just to keep up with population growth.

After dropping on Thursday, stocks plummeted further on Friday to finish in negative territory for the week. The

Dow Jones Industrial Average

lost 1.3% for the week to close at 10,055.2, the S&P 500 lost 0.8% to 1122.14 and the

Nasdaq Composite

slipped 1.1% to 1919.97.

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Along with weak labor markets, oil prices hitting another record of $53.31 weighed on future growth prospects and, by extension, major averages. Retailers, homebuilders and technology stocks led the market lower.

The yield on the Treasury's 10-year note, which was as high as 4.24% earlier in the week, finished Friday at 4.13%. Traders still expect the Fed to hike short-term rates by 25 basis points in November but cut the odds of a December hike to less than a 25% chance.

Looking further out, the futures markets dropped expectations for 2005 short-term rates from a range of 3%-3.25% down to 2.75%-3% on Friday in eurodollar contracts trading.

Eventually, less Fed tightening also should be good for the equity markets as it leaves more stimulus in place for growth and keeps the cost of capital low. But without any signs of accelerating growth, equities can hardly advance much.

Minneapolis Fed President Gary Stern did sound a note of caution amid the bond market's euphoria. After the jobs data were released, he told

Reuters

on Friday that the labor weakness wasn't going to change the Fed's outlook much.

"I don't find it inconsistent with the path we are on," he said. Repeating the Fed's standard language that it would hike rates at a "measured" pace, Stern said: "What we have been seeing in my mind doesn't change that."

Housing at 20 Paces

The week also reflected the tug-of-war between bulls and bears on the residential real estate sector. Although Friday was an up day for many of the homebuilders, the Philadelphia exchange's index for the sector finished the week down 6%.

Weaker housing markets also could prompt the Fed to go slower as the robustness of home sales and construction have helped reassure bankers that the soft patch wouldn't last.

The rising yield on the Treasury's 10-year note early in the week hurt, but it was a series of company-specific third-quarter shortfalls that really hurt. The builders often trade in synch with the 10-year note because its yield is used to set mortgage rates and higher rates lead to lower demand -- and prices -- for housing.

A warning on

Monday by

Pulte Homes

(PHM) - Get PulteGroup, Inc. Report

, at the time the biggest builder by stock market value, that it was cutting prices dramatically in Las Vegas crushed the sector. On

Tuesday, the carnage continued. Wednesday,

Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report

said its orders looked great, giving the sector a lift. Thursday,

M/I Homes

(MHO) - Get M/I Homes, Inc. Report

reported a 14% decline in new orders and

D.R. Horton

(DHI) - Get D.R. Horton, Inc. Report

said its order book grew more slowly than in previous quarters and less than analysts had expected.

On Friday, another small fry,

William Lyon Homes

( WLS), said new orders in the third quarter were down 33% from a year ago. Orders fell in California and Nevada, while in Arizona, the only other state where the company operates, orders rose.

For the week, Pulte dropped 18% to $50.68, D.R. Horton lost 11% to $29.34, and Toll Brothers fell 5% to $43.75. M/I lost 7% to $36.69 and William Lyon ended with a 14% loss at $77.

By all manner of measures, and as

previously discussed, home prices have risen beyond the fundamentals; mortgage debt is staggeringly high and new construction is running at an unsustainable pace. As

StreetInsight.com

contributor Doug Kass put it, "the homebuilders are now a massive short opportunity."

That doesn't mean the housing sector is going to fall out of bed overnight. Rather, it could mean the market is reconsidering the growth rates of prior years as an indicator of next year's results.

"After three years of red-hot growth, we believe the industry has reached a plateau where the compelling demographic and supply-demand fundamentals are counterbalanced by the specter of rising interest rates," Dana Richardson, an analyst at Argus Research, wrote on Friday. Pulte shares are fairly valued after the week's drop, Richardson said.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.