Market Insider

Published: Thursday, 5 Nov 2009 | 9:08 PM ET

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Unemployment could crack 10 percent, but job losses should start to show signs of bottoming.

Markets have been hanging on the October employment report, expected to show a drop of 175,000 nonfarm payrolls when it is released at 8:30 a.m. Friday.

"Our number is -140,000, which is a little stronger than consensus," said J.P. Morgan economist Bob Mellman. Mellman said he expects to see an unemployment rate of 10 percent, a bit higher than the street's expectation of  9.9 percent.

"We have a peak of unemployment at 10.2 percent. I don't think we're quite there yet. We have to get where we have rising job growth of about 100,000 a month before the unemployment rate levels off, and we think that would be in the the first quarter," he said.

Stocks ran up ahead of the much anticipated Friday number, driving the Dow above 10,000 once again. The rally was fanned by better economic data and Cisco's strong earnings report. Non farm productivity surged to a 9.5 percent annual rate, and new weekly jobless claims were at 512,000, a 10-month low.

"They kind of floated it up on air," said Art Cashin, director of floor operations at UBS, of the stock market. "There were buy programs and nobody to stand in their way, and that's how you turned it up." Traders have been expecting volatility this week, but several said they were surprised the market moved higher Thursday.

The Dow jumped 2 percent, or 203 points to 10,005, while the S&P 500 rose 1.9 percent to 1066. At the same time, the dollar was mixed, as the dollar index rose but the greenback lost more ground against the euro. Commodities turned in a mixed performance.

"Equities guys are betting it (the jobs number) surprises to the upside, rather than the downside," said Boris Schlossberg of GFT Forex.

"If that's the case, the big numbers across the big global risk trade have been 1,100 on the S&P 500, 10,000 on the Dow, and $1.50 euro dollar. If we get the positive story, then all of those numbers get retested again," he said.

Besides the jobs report, wholesale trade is released at 10 a.m. and consumer credit is reported at 3 p.m. AIG reports earnings ahead of the bell, and Berkshire Hathaway reports after the close.  Starbucks late Thursday reported better than expected profits of $150 million, and its shares were moving higher.

Jobs, Jobs, Jobs

The jobs report has been a major focus for traders this week. The employment situation remains the most worrisome aspect of the recovery, and economists do not see the unemployment rate bouncing back any time soon. A headline number of 10 percent could spook the market, even though it is an expected outcome, they say.

Mesirow Financial Chief Economist Diane Swonk expects to see job losses of 200,000 and an unemployment rate of 9.9 percent. "Whether it is 9.9 percent, 9.8 or even 10, it's just noise at this point in time... My concern is the longer people are unemployed, the lower their chances of getting re-employed," she said.

Swonk believes the jobs recovery will be slow, and that unemployment will not return to a level of 6 percent until the end of 2013. "I hope I'm wrong," she said.

"The good news is the pace is abating and we are yet to see the turning point on hiring. I think we will see that before the end o f the year, but it will be muted," she said.

Swonk said the credit constraints on small business are a concern because that segment of the economy is responsible for 60 percent of employment.

Deutsche Bank chief U.S. economist Joseph LaVorgna said he expects Friday's numbers to show a decline of 175,000 in non farm payrolls. "The numbers will look pretty lousy," he said. But he is more upbeat on rehiring.

"The key thing is you've got massive productivity gains, which are unsustainable because companies have over cut their payrolls. So if you have an incremental increase in demand and improvement in the economy, that will give way, in our opinion, to some serious hiring," he said.

Swonk said one area that might show new signs of job losses is health care, which has been pretty much insulated so far. "We know the pressure on health care is pretty intense because people are shedding their health care as their overtime goes away. They're trying to preserve their disposable income by cutting back on insurance coverage," she said.

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