Market volatility to remain amid jobs, manufacturing data

SAN FRANCISCO (MarketWatch) -- U.S. stocks are expected to remain choppy next week as investors look to key employment and manufacturing reports to determine whether the economy is headed for a recession next year.

"Volatility is...going to be one of the hallmarks," of the coming trading sessions, said John Caldwell, investment strategist at McDonald Financial Group.

The market's tone has been set by this week's reports of the first contraction in the manufacturing sector since April 2003.

The Institute for Supply Management's November manufacturing index and the Chicago Purchasing Managers Index took on greater-than-usual importance because they raise concerns about the whether the economy is headed for a so-called hard or soft landing, said Caldwell. See ISM report. See Chicago PMI.

The monthly employment report will be released by the Labor Department on Friday and garner attention. But Steve Goldman, chief market strategist at Weeden & Co., said Tuesday's factory orders number could be a more key driver of stocks.

If manufacturing continues to weaken, "systematically, unemployment could shift with that later on," said Goldman.

Economists are expecting 119,000 jobs to have been created in November, up from 92,000 in October, according to a survey of conducted by MarketWatch. The jobless rate is expected to edge up to 4.5% from 4.4% in October, which was the lowest level since May 2001.

Revisions to third-quarter productivity are due Tuesday from the Labor Department. Caldwell expects to see another period of slow growth and that could heighten the central bank's worries about inflationary pressures.

Federal Reserve Chairman Ben Bernanke said in a speech this week that inflation has been "better behaved of late" and that the economy is on track to expand at a moderate pace over the next year without much of a slowdown.

But more investors are hedging their bets against Bernanke's projection. The odds that the Fed will cut rates early next year jumped after Friday's weak manufacturing report.

The fed funds futures market at the Chicago Board of Trade has now priced in a 28% chance of a rate cut to 5% from 5.25% in January and an 80% chance of a cut in March.

The central bank is expected to leave rates unchanged when it meets on Dec. 12.

Mike Holland, manager of the Holland Balanced Fund, expects stocks to gain ground next week and through the end of the year. He said he's taking his cue from the many large multinational companies that have been describing their business bookings as "robust" through year's end.

Caldwell said the decline in stocks this week could have been much worse considering that oil prices simultaneously surged 7%. See Futures Movers.

However, he's still advising clients to move cautiously.

"We're not adverse to taking money off the table in the near term...and using the market volatility to our advantage."

Stocks down for the week, up for November

Direction in the equity market was erratic this week. Two trading sessions ended lower, one finished flat, and two closed higher, including a rally on Tuesday following the upward revision in gross domestic product for the third quarter.

The major indexes climbed from their lowest levels on Friday, but ended with losses for the day and the week.

On the week, the Dow Jones Industrial Average lost 0.7%; the Nasdaq Composite Index fell 1.9%; and the S&P 500 Index shed 0.3%. Read Friday's Market Snapshot.

However, stocks ended higher in November. The Dow rose 1.2%, the S&P gained 1.6%, and the Nasdaq jumped 2.7%.

Holland said the steep fall in the U.S. dollar against major currencies has spurred a "crisis mentality" in the market. The dollar on Friday fell to multi-month lows against the euro and yen, and to a 14-year low against the British pound.

For the week, the dollar lost 2.4% versus the euro and lost 0.5% against the yen. See Currencies.

The downfall has been so sharp and fast, said Holland, that the greenback's decline may be nearing its bottom, and he, for one, would welcome a leveling off sooner than later.

"I can't believe it's [nearing] $2 for the pound right now," he said as he prepared for a business trip to London.

Gold futures fell $2.30 to $650.60 on ounce on Friday but ended up 2.5% for the week. Read Metals Stocks.

Treasury prices rallied on Friday, leaving the yield on the benchmark 10-year Treasury note at its lowest level since late January. The yield closed at 4.425% from 4.458% on Thursday. See Bond Report.