Today’s jobs report will probably confirm the continuing free fall in the economy already shown by the ADP report and weak corporate guidance. The credit freeze weakens the labor environment, which stops consumption.

I think the key variable in the outlook is the pace at which the Fed buys assets to unfreeze credit markets. It was the Fed’s announcement in late November that it would purchase MBS that lifted financial markets.

The Fed began actual MBS purchases on January 5, buying $10.2 billion on Monday through Wednesday. Each purchase by the Fed pushes new liquidity into private sector credit markets. This is especially important since commercial banks are on the sideline. The Fed should be able to reopen credit markets and allow lower lending rates, but the pace is important and is the key variable.

Several factors argue that the next equity rally, perhaps in March-April, will be stronger than the current one.

• Equity markets are in an uptrend right now with higher highs and lows, but the tendency to test the November bottom is still lurking.

• The economy is still in freefall with jobless claims likely to climb back toward 600,000 in coming weeks.

• It will probably take the Fed at least several more weeks to ramp up its quantitative injections.

• The Obama administration probably won’t try to lift confidence until it’s in office, has distinguished itself from the Bush administration, and has made progress on the stimulus legislation. That won’t be until well into February.

• At that point, perhaps late in the first quarter, I expect substantial tightening of corporate credit spreads, higher corporate bond issuance, and a sustained decline in jobless claims from very high levels. That would set the stage for stronger equity gains.

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