The negative news just keeps on rolling. The Bank of Japan’s Tankan Survey, similar to our Beige Book, showed large manufacturing businesses growing for the first time in two years, but the positives were outweighed by the China Purchasing Managers’ Index which slipped to 52.1 from 53.9 in June. Concerns that world economies may dip into a recession are slowing production of exports. The news weighed on Asian stock markets, with the Nikkei down 2.0% and the Shanghai Composite off 1%. European markets started the day a little less negative on the results of a Spanish bond auction, at least until our domestic economic news rolled out. The Spanish government sold $4.3 billion of 5-year bonds with a bid to cover of 1.7. That is below the 2.35 bid to cover of the last auction, but the yield was only slightly higher than the prior auction at 3.657% versus 3.532%. This was somewhat of a positive, in as much as they were able to get the auction completed.
Domestic economic news didn’t live up to the estimates, and that was certainly a disappointment. Initial Jobless Claims popped right back up to 472,000 from a slightly revised 459,000. Expectations were for 455,000. Economists keep hoping that we’ll stabilize at 450,000 and then head lower, suggesting a better employment picture, but it simply isn’t happening yet. Construction Spending for May slipped just 0.2%, not nearly as negative as the estimate for a drop of 0.8%. The April gain, due to the last days of the government supported real estate sales, was revised to a gain of 2.3% from 2.7%. That puts the net/net over the two months only slightly ahead of expectations. In the housing sector, the Pending Home Sales were every bit the disaster that the housing numbers have been over the past few weeks. Sales plunged 30.0% in May after rising 6.0% in April. This reflects the decline in “contract signings”, which was fully anticipated, just that the rate of change from one month to the next was extreme. This is similar to the cash-for-clunkers deal we saw in auto sales. Immediately after the incentive went away, sales plunged. A couple of months later, sales got back on track. Only time will tell, but we need to get past the post-incentive period to test real buy interest.
One of the bigger reports out this week was within the ISM data. The index fell to 56.2 from 59.7. Expectations were for a much smaller downtick to 59.0. This is a June number, so it carries more weight. It also followed very mixed data from the regional surveys. The component data really reflect that same sentiment, that the national data are mixed. Prices Paid fell dramatically to 57.0 from 77.5. A dip to 70.0 was anticipated. This will give the “deflation” hawks some ammo at finding ways to add stimulus. The important component data stayed above 50, denoting growth. New Orders were at 58.5, a solid number, but still down from 65.7. Production was at 61.4, lower than the 66.6 in May, but still not enough to keep up with demand. Order backlogs were 57.0 versus 59.5. This pressured inventories, which continued to be depleted, holding steady at 45.8 versus 45.6. There was more hiring. Employment is at 57.8 versus 59.8. Above 50 is good news, but after a disappointing claims report, it wasn’t good enough.
It’s unfortunate that economists don’t run the government. It’s not that they would agree on what to do, I suppose, but at least they would likely be less political about taking the hard stance toward fixing problems. As the economy slows after the bounce off of the bottom, a well-placed tax incentive would go a long way toward increasing jobs and growth. However, such a decision would have to be made before congressional leaders take off for summer and worry more about their own jobs and campaigns, and less about making the tough decisions to get the economy back on track. That leads us to today’s jobs report. Main Street and Wall Street are transfixed on jobs despite the fact that many will admit that this is a jobless recovery. That means we aren’t going to see jobs pick up quickly, in part because the average weekly hours is still well below normal. What would be a positive surprise would be an uptick in the average weekly hours. No change is expected, but each 1/10th of an hour equates to 400,000 new jobs, so it could be a silver lining, if we see an uptick. Overall, non-farm payrolls are expected to drop by 125,000 after rising 431,000 in May. The official estimate was for about 100,000 new private sector jobs, but the real expectation should be lower after ADP came out with its estimate for just 13,000 and yesterday’s slightly disappointing jobless claims report. Perhaps a glimmer of hope came for the job market from Challenger Gray & Christmas. The outplacement firm’s survey of June planned layoffs were basically unchanged from the 39,358 in May. That is 47% less than in June 2009 and the six month rate is at the slowest pace in a decade. According to the CEO of the survey firm, John Challenger said that employers are NOT anticipating a double dip recession. That should be good news for practically everyone, especially the media, which seems to think it is a foregone conclusion.
After the market rolled lower on the negative news, the S & P bounced off of 1010, slightly below the initial target of 1015, but still well above the 1000 support. However, the talk is all gloom and doom. The bears had it all yesterday and made a modest push for lower prices. The bulls probably weren’t ready to stampede, given the uncertainty over today’s employment report and the upcoming earnings. However, we are in short-term oversold territory. If we can get a catalyst, the first to exit before a long three-day weekend and go home winners will be the shorts. All the indications are for today’s number to be a disappointment. Being a contrarian at heart, I’m hoping to see a positive surprise. How bad will the news need to be to unsettle the market? Non-farm payrolls are expected to fall 100,000. Watch for revisions to May’s census induced 431,000. The Unemployment rate is expected to rise to 9.8% from 9.7%. Manufacturing jobs are expected to add 25,000. Hourly earnings should uptick 0.1%, while hours work are unchanged. It was tough to get anyone motivated ahead of such an important economic report, but under the circumstances, the action wasn’t all that bad.
The negative news just keeps on rolling. The Bank of Japan’s Tankan Survey, similar to our Beige Book, showed large manufacturing businesses growing for the first time in two years, but the positives were outweighed by the China Purchasing Managers’ Index which slipped to 52.1 from 53.9 in June. Concerns that world economies may dip into a recession are slowing production of exports. The news weighed on Asian stock markets, with the Nikkei down 2.0% and the Shanghai Composite off 1%. European markets started the day a little less negative on the results of a Spanish bond auction, at least until our domestic economic news rolled out. The Spanish government sold $4.3 billion of 5-year bonds with a bid to cover of 1.7. That is below the 2.35 bid to cover of the last auction, but the yield was only slightly higher than the prior auction at 3.657% versus 3.532%. This was somewhat of a positive, in as much as they were able to get the auction completed.
Domestic economic news didn’t live up to the estimates, and that was certainly a disappointment. Initial Jobless Claims popped right back up to 472,000 from a slightly revised 459,000. Expectations were for 455,000. Economists keep hoping that we’ll stabilize at 450,000 and then head lower, suggesting a better employment picture, but it simply isn’t happening yet. Construction Spending for May slipped just 0.2%, not nearly as negative as the estimate for a drop of 0.8%. The April gain, due to the last days of the government supported real estate sales, was revised to a gain of 2.3% from 2.7%. That puts the net/net over the two months only slightly ahead of expectations. In the housing sector, the Pending Home Sales were every bit the disaster that the housing numbers have been over the past few weeks. Sales plunged 30.0% in May after rising 6.0% in April. This reflects the decline in “contract signings”, which was fully anticipated, just that the rate of change from one month to the next was extreme. This is similar to the cash-for-clunkers deal we saw in auto sales. Immediately after the incentive went away, sales plunged. A couple of months later, sales got back on track. Only time will tell, but we need to get past the post-incentive period to test real buy interest.
One of the bigger reports out this week was within the ISM data. The index fell to 56.2 from 59.7. Expectations were for a much smaller downtick to 59.0. This is a June number, so it carries more weight. It also followed very mixed data from the regional surveys. The component data really reflect that same sentiment, that the national data are mixed. Prices Paid fell dramatically to 57.0 from 77.5. A dip to 70.0 was anticipated. This will give the “deflation” hawks some ammo at finding ways to add stimulus. The important component data stayed above 50, denoting growth. New Orders were at 58.5, a solid number, but still down from 65.7. Production was at 61.4, lower than the 66.6 in May, but still not enough to keep up with demand. Order backlogs were 57.0 versus 59.5. This pressured inventories, which continued to be depleted, holding steady at 45.8 versus 45.6. There was more hiring. Employment is at 57.8 versus 59.8. Above 50 is good news, but after a disappointing claims report, it wasn’t good enough.
It’s unfortunate that economists don’t run the government. It’s not that they would agree on what to do, I suppose, but at least they would likely be less political about taking the hard stance toward fixing problems. As the economy slows after the bounce off of the bottom, a well-placed tax incentive would go a long way toward increasing jobs and growth. However, such a decision would have to be made before congressional leaders take off for summer and worry more about their own jobs and campaigns, and less about making the tough decisions to get the economy back on track. That leads us to today’s jobs report. Main Street and Wall Street are transfixed on jobs despite the fact that many will admit that this is a jobless recovery. That means we aren’t going to see jobs pick up quickly, in part because the average weekly hours is still well below normal. What would be a positive surprise would be an uptick in the average weekly hours. No change is expected, but each 1/10th of an hour equates to 400,000 new jobs, so it could be a silver lining, if we see an uptick. Overall, non-farm payrolls are expected to drop by 125,000 after rising 431,000 in May. The official estimate was for about 100,000 new private sector jobs, but the real expectation should be lower after ADP came out with its estimate for just 13,000 and yesterday’s slightly disappointing jobless claims report. Perhaps a glimmer of hope came for the job market from Challenger Gray & Christmas. The outplacement firm’s survey of June planned layoffs were basically unchanged from the 39,358 in May. That is 47% less than in June 2009 and the six month rate is at the slowest pace in a decade. According to the CEO of the survey firm, John Challenger said that employers are NOT anticipating a double dip recession. That should be good news for practically everyone, especially the media, which seems to think it is a foregone conclusion.
After the market rolled lower on the negative news, the S & P bounced off of 1010, slightly below the initial target of 1015, but still well above the 1000 support. However, the talk is all gloom and doom. The bears had it all yesterday and made a modest push for lower prices. The bulls probably weren’t ready to stampede, given the uncertainty over today’s employment report and the upcoming earnings. However, we are in short-term oversold territory. If we can get a catalyst, the first to exit before a long three-day weekend and go home winners will be the shorts. All the indications are for today’s number to be a disappointment. Being a contrarian at heart, I’m hoping to see a positive surprise. How bad will the news need to be to unsettle the market? Non-farm payrolls are expected to fall 100,000. Watch for revisions to May’s census induced 431,000. The Unemployment rate is expected to rise to 9.8% from 9.7%. Manufacturing jobs are expected to add 25,000. Hourly earnings should uptick 0.1%, while hours work are unchanged. It was tough to get anyone motivated ahead of such an important economic report, but under the circumstances, the action wasn’t all that bad.