The Institute of Supply Management reported this morning that their index of activity in the manufacturing sector rose slightly from November's 56.6% to 57.0% in December. This marks the second increase in the past three months and puts the index at its highest level since May. Though production remains sturdy, it is not yet translating into expanding job creation - the employment component of this index experienced a 2-point decline from month earlier levels.



The unexpected drop in job creation at the nation's factories probably has many analysts making some downward adjustments to their forecast for the headline December nonfarm payroll report due on Friday at 8:30 a.m. ET.



As I write the majority of market participants are anticipating the economy created 130,000 more jobs in December than it lost -- while the national jobless rate is expected to edge back to 9.7% from November's 9.8% mark. Such an outcome is not totally out of the question. With the virtually certain drop in manufacturing job creation - and continued weakness from local, state, and federal employment -- it will take a supersized surge in private sector hiring to push the December headline nonfarm payroll number over the 130,000 mark.


The "wild card" this week will be trading action in the stock markets.

Strong economic data topped-off with a better than expected December nonfarm payroll data should be "just-the-thing" to extend the current rally in stock markets at the expense of higher mortgage interest rates. However, a weak December nonfarm payroll report will likely cause a heavy round of profit-taking in the stock markets to develop. If this scenario plays out, the flow of capital from riskier asset classes into the relative safe haven of Treasury obligations and mortgage-backed securities will be very supportive of steady to fractionally lower mortgage interest rates.