If you look in all the right places, its turning out to be a beautiful day: inflows into equity funds are strong, the Dow, NASDAQ, and S&P 500  enjoyed solid rallies, an apparent break in OPEC's resolve has sent oil prices plummeting, and this morning's non farm payroll numbers showed surprising weakness. All in all, it would seem, a good day, and one that speaks of better days to come.

A glance at the broader landscape, however, shows that things are a little less serene than they seemed at first glance, and behind each of the bright spots there is a darker story waiting to be told, a story that could make the outlook for the coming days and weeks a little less sanguine.

In this morning's early commentary, we said "We are looking for non-farm payrolls to come in below consensus due to the impact of Hurricane Floyd. While a much lower than expected non farm payroll figure would likely provide the necessary fuel for a market rally.... we would be inclined to regard any such reading as a storm skewed aberration that is unlikely to decrease the odds of further Fed tightening."  Our expectations for a weak number were met, with non farm payrolls showing a surprising drop of 8,000 during September, much weaker than the consensus expectation of a gain of 220,000.

While Hurricane Floyd's impact played a large part in the weaker than expected payrolls numbers, we would not be so quick to regard the remainder of the drop, or the downward revision in August numbers, as a sign that the economy is slowing.

 Rather than a sign of slowing economic activity, the deceleration in non farm payroll gains over the past 2 months, when combined with September's stronger than expected 0.5% surge in average hourly earnings, is more likely a sign that employers are having a hard time finding qualified workers in the shrinking pool of available applicants and are being forced to raise wages to fill positions.

 On Tuesday the Fed said, "...the growth of demand has continued to outpace that of supply, as evidenced by a decreasing pool of available workers willing to take jobs. In these circumstances, the Federal Open Market Committee will need to be especially alert in the months ahead to the potential for costs to increase significantly in excess of productivity in a manner that could contribute to inflation pressures and undermine the impressive performance of the economy."

Today's non farm payroll numbers, rather than being a positive that will decrease the threat of a move by the Fed, are instead the exact type of numbers that the Fed warned could trigger inflation and force it to hike rates at a future meeting.

While today's employment data increases the odds that the Fed will be forced to act before year's end to quell developing inflationary pressures, today's numbers should not be regarded as the definitive answer to the question "will they raise rates before year end".  The Fed will need to see further evidence of inflationary pressures in upcoming data  before making a final decision.  The October employment report now takes on added importance.  If the wage pressures shown by the September numbers make a repeat appearance next month, look for a November rate hike to be a done deal.

Aside from the employment report, today's other bright spots also appear a bit dimmer, and grayer, on second glance.

The strong inflows into equity mutual funds during the past week were largely channeled into large cap equity funds, which enjoyed their strongest inflows in 5 months, according to the latest figures from AMG Data.

The public's preference for the largest of large caps is evident in today's market, as the large cap averages (along with the oil sensitive transports) surge, while the midcap and smallcap averages are left behind.  While the S&P 500 and Dow finished the day with better than 1% gains, the S&P midcap 400 lost nearly 1%, and the Russell 2000 ended the day with a marginal loss.

The narrowness of today's rally is also apparent in today's advance/decline numbers, with decliners leading advancers by 70 issues on the NYSE, and up/down volume in a dead heat.  In short, the divergence between the haves (narrow basket of large cap crowd pleasers) and the have nots (broader market) continues to grow.

With the bond market taking a much needed day off on Monday, today's big cap rally will be given a free rein to continue for another day, but don't expect it to last.

Also in the 'don't expect it to last' category is this week's plunge in oil prices.  The decline in oil prices is one part correction from extremely overbought levels, and two parts fear that the resolve of some OPEC nations to maintain production cuts is wavering.  The continued weakness of many OPEC economies, and their dependence on higher oil prices to kick start nascent economic recoveries,  will quickly force any errant members back in to line.