Trading could be choppy, with thin volume in a Memorial Day-shortened week. Investors will have to wrestle with a heavy docket of economic data and the last gasps of quarterly earnings season, which will include reports from Dell Inc. , Costco Wholesale Corp. and Sears Holdings Corp. .
"Good economic news could be perceived as a short-term negative as the hopes of any interest rate cuts continue to fade," said Peter Cardillo, chief market strategist at S.W. Bach.
In addition to May payrolls, economic data set for release next week include the Chicago PMI, the Institute of Supply Management's latest reading on the manufacturing sector, pending home sales, consumer confidence and core PCE inflation.
Also, the Federal Reserve will release minutes from its most recent policy setting meeting on Wednesday, which should sharpen investor focus on the direction of interest rates in the medium term.
Trading in futures as recently as a month ago implied a 34% chance of a Federal Reserve rate cut by September. But that rate had fallen to about 13% on Friday as stronger economic data, suggestions of inflation, and healthy corporate earnings have undermined forecasts for a near-term rate cut. During that time, the market has also shifted from expecting one or two rate cuts by the end of the year to forecasting none or just one.
This week's trading may have provided a preview of how a series of strong economic indicators might affect equities. Stocks dropped Thursday after a surprise jump in new home sales in April and durable-goods orders came in stronger than anticipated at 0.6%.
But what could soothe investor concerns about the direction of interest rates in the wake of strong data would be a tame reading on core personal consumption expenditures, said John Forelli, portfolio manager at Independence Investments. The Fed has kept its key interest rate at 5.25% since June of 2006.
"That's where the inflation data comes into play. If the data is benign, the market may even welcome strong economic growth," he said. "That being said, the market is a bit overextended...and is due for some consolidation."
The core PCE, due Friday, is the Fed's favored measure of inflation. Economists surveyed by MarketWatch expect April's core PCE index to tick up 0.2% from 0.1%.
Policy makers at the central bank also monitor inflation through average hourly earnings, which are included in the Labor Department's monthly jobs report. The consensus is for an increase to 0.3% from 0.2% in April.
The job figures will take on added significance, said Jim Paulsen, chief investment officer at Wells Capital Management, because the recent run of declining jobless claims suggests a much stronger tone to the job market than what people thought just a few weeks ago.
Economists forecast nonfarm payrolls to have increased by 150,000 in May, well above the 88,000 jobs that were added in April. The unemployment rate is expected to remain steady at 4.5%.
A strong increase in payrolls would be consistent with indications that other areas of the economy are improving, said Paulsen.
"What we'll have is evidence that business spending is back, manufacturing is coming out of an inventory correction, and that the consumer looks fine with job creation...and that's going to continue a string of reassessments about people's expectations regarding the Fed."
Wall Street's benchmark stock indexes finished higher ahead of the long weekend, with a gain of 66 points on the Dow Jones Industrial Average fueled in part by Coca-Cola Co. , which said it plans a $4.1 billion urchase of water products company Energy Brands Inc.
The S&P 500 Index rose 8 points to 1,515.73 on Friday.
The broad index last week sat five points away from its all-time closing high of 1,527.46. But after failing to follow up on gains Monday, the index dropped further Wednesday when a market sell-off was spurred by former Federal Reserve Chairman Alan Greenspan's warning that Chinese stocks are headed for a sharp downturn.
The Nasdaq Composite climbed 19 points on Friday to 2,557.20. For the week, the Dow lost 0.4%; the S&P fell 0.5%; and the Nasdaq fell 0.8%.
By Carla Mozee