Jobs report to set weak tone next week

MARKET SNAPSHOT
Jobs report to set weak tone next week
Interest-rate expectations seen weighing on stocks following Easter break
By Ciara Linnane, MarketWatch
Last Update: 1:29 PM ET Apr 6, 2007

NEW YORK (MarketWatch) - A stronger-than-expected March jobs report will probably hurt U.S. stocks when investors have their first chance to react to the numbers on Monday.
Traders will likely drive shares lower when they return from the Easter holiday, suspecting the Federal Reserve's next move would be to hike rates and not to cut them, strategists said Friday.
Market optimists have been pinning their hopes on the Fed swooping in to rescue the weak U.S. economy with a rate cut. Lower rates would also help the housing sector, the market's main focus of concern as the meltdown in the subprime mortgage market continues with defaults on home payments and foreclosures surging.
"Right now, bad news is good news for equities. We're really looking for the Fed to cut rates sooner rather than later," said Stephen Sachs, head of trading at Rydex Investments. "Anything that upsets those hopes is bad for the stock market."
The Labor Department said Friday that the economy added 180,000 jobs in March, above the 168,000 jobs expected from a MarketWatch poll of economists. The jobless rate fell to 4.4% from 4.5% in February, against expectations it would remain unchanged.
Average hourly earnings rose an expected 0.3%, putting the annual rate at 4%. That's down from the 4.3% pace seen in December but still well above the Fed's comfort zone. Wage growth is a chief concern of Fed policymakers, who fear that wage pressures could nurture an inflationary psychology in the economy. See full story.
The shift in interest rate expectations was reflected in Federal funds futures, which fell after the report. The slim odds the market had priced in for near-term rate cuts have been almost erased. The May contract is indicating the rate will remain at 5.25% in May, while the July contract is pricing in a 12% chance for a rate cut to 5% at the June meeting, down from 20% odds Thursday. Treasurys tumbled Friday in a shortened trading session in New York. See Bond Report.
"We still look for the Fed to remain sidelined through the summer, but see better risk that the next Fed move will be a boost in rates, rather than a cut before year end," said analysts at research firm Action Economics.
The jobs report will set the tone for next week's trade but it's not the only important piece of data, according to Charles Campbell, head of sales at Miller Tabak.
The minutes from the Federal Reserve's last meeting will be released on Wednesday and could revive worry that the Fed is focused on fighting inflation to the detriment of the economy, he said.
The producer price index due on Friday "could be a problem, too, if inflation is too strong," he said.
Next week also sees the launch of the first-quarter earnings season with aluminum giant Alcoa Inc. scheduled to report results after the bell Tuesday.
And then there's the broader political picture to consider, Campbell said.
"You still have Iran as an issue and you still have Syria," he said. "These problems are not going away."
U.S. stocks closed the shortened week higher on Thursday. The Dow Jones Industrial Average ($INDUDow Jones Industrial Average
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$INDU ) gained 1.7% on the week. The S&P 500 ($SPXS&P 500 Index
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$SPX ) rose 1.6% and the Nasdaq composite (COMPNasdaq Composite Index
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COMP ) enjoyed a 2.1% gain. See Market Snapshot.
Earnings back in focus
Alcoa (AAalcoa inc com
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AA ) is expected to report earnings of 75 cents a share when it publishes results for the first three months of the year on Tuesday afternoon, according to estimates from Thomson Financial.
Earnings are expected to slow from the fourth quarter when they climbed 58% -- or 111% excluding one-time items.
On the plus side, resurgent aluminum prices are again likely to underpin profits at Alcoa, which is now vying with Russia's UC Rusal for the title of the world's largest aluminum producer.
But Alcoa encountered some rough ground over the quarter, including a general strike in Guinea where it has a joint venture producing bauxite, or aluminum ore.
Credit Suisse analyst David Gagliano cited the strike and increased start-up costs at a smelter in Iceland when he cut his first-quarter profit forecast by five cents to 76 cents a share in a note published Thursday. See Alcoa outlook.
The other heavyweight earnings report due next week is from General Electric Co., (GEGeneral Electric Company
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GE ) which will release its results on Friday before the market opens.
Given GE's strong role as a financial services provider, and as the fifth-biggest subprime lender in the U.S., traders will be looking for clues on just how far the meltdown in the subprime mortgage market stretches into the lending industry.
GE likely isn't in danger of missing its consensus, as its net exposure to the riskier lending section of the mortgage market is relatively low, but the quarter's "puts and takes," including restructuring costs, will be evaluated closely.
Analysts polled by Thomson Financial forecast earnings, on average, of 44 cents a share, the middle of GE's own estimate of 43 cents to 45 cents a share.
Analyst forecast sales at the Fairfield, Conn., maker of industrial and consumer products at $39.8 billion, which would be an increase of more than 5% over the prior year's first quarter.
Overall corporate earnings expectations for this quarter are gloomy with most analysts forecasting an end to the record 14 consecutive quarters of company earnings rising more than 10% on average.
Thomson Financial is expecting S&P 500 companies to achieve average earnings growth of about 4%. At Zacks Research, the forecast is for 8.3% growth.
Also dampening earnings strength in the first quarter are comparisons with the year-ago period, when some big companies benefited from a post-Hurricane Katrina construction boom, said Zacks senior market analyst Charles Rotblut.
"In general the economy was a little bit stronger last year than it was this year," he said.
Economic spotlight
The economic calendar is light next week although some key reports are slated for release, starting Wednesday with the latest Fed meeting minutes.
Economists polled by MarketWatch are expecting the March import price index due Thursday to rise 0.8% after 0.2% in February.
On Friday, the February trade gap is expected to widen to $60.2 billion from $59.1 billion in January.
The producer price index is expected to climb 1% in March after rising 1.3% in February. Core producer prices - excluding food and energy prices - are expected to climb 0.2% after a 0.4% rise in February. 
Ciara Linnane is markets editor for MarketWatch in New York.