It was a tough week, to say the least. We turned the page from the second quarter with the averages posting significant losses from their April peaks. It was just two months ago that investors saw a spotty recovery, aided by government stimulus and confidence that financial reform would bring a skeptical public back into the markets. Now we are facing a spotty recovery with financial reform looking to pass and offer a skeptical public some assurances. Not much has changed, except for the outlook of what is ahead. The amazing thing is that expectations have always been for a weaker second half of 2010. I don’t know of anyone that was looking for the economy to really pick up steam in Q3. The amount the economy might slow has always been in a wide range. However, the threat of a “double dip” recession has taken hold, fueled by fears that Europe would fall into a recession under the weight of austerity measures, a weakening recovery in housing, and an ever-lagging recovery in jobs. Europe’s weakness has been a major catalyst of negative news, especially in their markets. Who didn’t know that home sales would fall off a cliff in the months after the government pulled back its tax credit? Jobs became the main focal point in expectations for a failed recovery. However, it had never been in our estimation that jobs would improve much in 2010.
When economists talk about a “jobless recovery”, is there something unclear about combining those two words? On Friday, the June report on employment clearly highlighted the first part of that statement, “jobless”. Still skewed by census workers, the government let go 225,000 temporary workers collecting census data. Therefore, June saw a decline of 125,000 jobs, pretty close to the 130,000 job loss anticipated. As for the private sector job creation, it came up a little short, just 83,000 jobs versus expectations for 110,000. Manufacturing was a surprise, adding only 9,000 versus the 25,000 consensus forecast. The big surprise was that the unemployment rate fell to 9.5% from 9.7%. Expectations were for an increase to 9.8%. However, the reason for the decline was that 652,000 workers decided to stop looking for a job. That pretty much falls in line with the disappointing consumer confidence number, falling to 52.9 in June from 62.7. This decline in the number of people looking for work will come back to haunt us. When the job market picks up, those willing to say they are looking increases, typically causing the unemployment rate to rise temporarily as the number of new jobs increase. We’re not there yet.
The “jobless” part of the statement seems self explanatory. It’s the “recovery” part that is in question. This is what has the markets baffled at the moment. Is this a double-dip recession or a recovery? To that end, investors are moving closer to discounting a disappointing GDP number for the second quarter. However, a double-dip would require two quarters of negative GDP growth. While a slowdown to 2.8% in the third quarter and 2.5% in the fourth quarter is the current consensus (MarketWatch), it’s a far cry from being negative. We may, indeed, slow much further than these current figures, but growth of 2.0% is still possible, if not probable, for the rest of this year. One of the growth factors is inventory. The second quarter may actually post a disappointing inventory number, based on the fact that the regional Fed surveys showed negative numbers in May and/or June. Last week’s ISM Inventory number held steady at 45.8 versus 45.6 in May, both below 50. Adding to inventory would add to GDP. After six quarters of negative inventory numbers detracting from GDP, the first quarter showed its first small increase. Expectations were for a further recovery in inventory, but if that doesn’t happen, the second quarter growth could be impacted. However, if the inventory rebuild process is pushed out, it would help even out growth in the latter half of this year, at least from an annualized GDP perspective. Therefore, we still expect a “recovery”, albeit a very slow one. That leads us to the “jobless recovery” conclusion, which went from being the consensus to now being the optimistic projection. Our view has not changed. We still see the potential for growth without job growth.
That leads us to this week’s void of economic data. The ISM Services Index is due out today, expected to hold at 55.0 versus 55.4. What remain on the horizon are earnings. Companies that have reported on an early fiscal calendar have only met expectations, at best, but nearly all are taking the bears’ outlook on the economy. Forecasts for the third quarter have been coming down. Companies have acted accordingly, cutting estimates, refusing to hire workers, depleting inventories to the bear bones, and hoarding cash. This is the camel that has yet to see a straw that breaks its back. If companies are so prepared for an economic slowdown, keeping costs low and balance sheets strong, then they should be able to provide some good news in the quarterly reporting process. Over the past week or two, investors have moved to the expectation that all news is bad news. This week won’t provide us much information, as we face a very light, holiday shortened week on the economic calendar.
Technically, the market action has been nothing short of disappointing. After breaking the February/May/June intra-day low of 1040, a level that many saw as the technical break that would send the S & P to 860, we’ve shed 18 points to close at 1022. We now have 5 consecutive days on the downside for the S & P, 7 in the Dow. Friday absorbed the employment data fairly well. In fact, with only a few minutes until the close, the averages had erased the session losses, but were caught in a wave of late-Friday selling that kept the arrows red. Perhaps surprising was that the Volatility Index, VIX, had a reversal day down on Thursday and then gapped and stayed down on Friday. The VIX moves opposite to the implied direction of the market. The 10-week moving average on the VIX is at 29.56 and it closed at 30.12. Keep an eye on the direction of the bears today. Last week, the Euro popped above its June closing high of 1.2389. It has a cushion at 1.2544, but as a proxy for how the EZ is fairing, keep an eye on the Euro this week as well. Since we don’t have much to watch, we’d be happy with a consolidation week with a bullish bias for these four days.
It was a tough week, to say the least. We turned the page from the second quarter with the averages posting significant losses from their April peaks. It was just two months ago that investors saw a spotty recovery, aided by government stimulus and confidence that financial reform would bring a skeptical public back into the markets. Now we are facing a spotty recovery with financial reform looking to pass and offer a skeptical public some assurances. Not much has changed, except for the outlook of what is ahead. The amazing thing is that expectations have always been for a weaker second half of 2010. I don’t know of anyone that was looking for the economy to really pick up steam in Q3. The amount the economy might slow has always been in a wide range. However, the threat of a “double dip” recession has taken hold, fueled by fears that Europe would fall into a recession under the weight of austerity measures, a weakening recovery in housing, and an ever-lagging recovery in jobs. Europe’s weakness has been a major catalyst of negative news, especially in their markets. Who didn’t know that home sales would fall off a cliff in the months after the government pulled back its tax credit? Jobs became the main focal point in expectations for a failed recovery. However, it had never been in our estimation that jobs would improve much in 2010.
When economists talk about a “jobless recovery”, is there something unclear about combining those two words? On Friday, the June report on employment clearly highlighted the first part of that statement, “jobless”. Still skewed by census workers, the government let go 225,000 temporary workers collecting census data. Therefore, June saw a decline of 125,000 jobs, pretty close to the 130,000 job loss anticipated. As for the private sector job creation, it came up a little short, just 83,000 jobs versus expectations for 110,000. Manufacturing was a surprise, adding only 9,000 versus the 25,000 consensus forecast. The big surprise was that the unemployment rate fell to 9.5% from 9.7%. Expectations were for an increase to 9.8%. However, the reason for the decline was that 652,000 workers decided to stop looking for a job. That pretty much falls in line with the disappointing consumer confidence number, falling to 52.9 in June from 62.7. This decline in the number of people looking for work will come back to haunt us. When the job market picks up, those willing to say they are looking increases, typically causing the unemployment rate to rise temporarily as the number of new jobs increase. We’re not there yet.
The “jobless” part of the statement seems self explanatory. It’s the “recovery” part that is in question. This is what has the markets baffled at the moment. Is this a double-dip recession or a recovery? To that end, investors are moving closer to discounting a disappointing GDP number for the second quarter. However, a double-dip would require two quarters of negative GDP growth. While a slowdown to 2.8% in the third quarter and 2.5% in the fourth quarter is the current consensus (MarketWatch), it’s a far cry from being negative. We may, indeed, slow much further than these current figures, but growth of 2.0% is still possible, if not probable, for the rest of this year. One of the growth factors is inventory. The second quarter may actually post a disappointing inventory number, based on the fact that the regional Fed surveys showed negative numbers in May and/or June. Last week’s ISM Inventory number held steady at 45.8 versus 45.6 in May, both below 50. Adding to inventory would add to GDP. After six quarters of negative inventory numbers detracting from GDP, the first quarter showed its first small increase. Expectations were for a further recovery in inventory, but if that doesn’t happen, the second quarter growth could be impacted. However, if the inventory rebuild process is pushed out, it would help even out growth in the latter half of this year, at least from an annualized GDP perspective. Therefore, we still expect a “recovery”, albeit a very slow one. That leads us to the “jobless recovery” conclusion, which went from being the consensus to now being the optimistic projection. Our view has not changed. We still see the potential for growth without job growth.
That leads us to this week’s void of economic data. The ISM Services Index is due out today, expected to hold at 55.0 versus 55.4. What remain on the horizon are earnings. Companies that have reported on an early fiscal calendar have only met expectations, at best, but nearly all are taking the bears’ outlook on the economy. Forecasts for the third quarter have been coming down. Companies have acted accordingly, cutting estimates, refusing to hire workers, depleting inventories to the bear bones, and hoarding cash. This is the camel that has yet to see a straw that breaks its back. If companies are so prepared for an economic slowdown, keeping costs low and balance sheets strong, then they should be able to provide some good news in the quarterly reporting process. Over the past week or two, investors have moved to the expectation that all news is bad news. This week won’t provide us much information, as we face a very light, holiday shortened week on the economic calendar.
Technically, the market action has been nothing short of disappointing. After breaking the February/May/June intra-day low of 1040, a level that many saw as the technical break that would send the S & P to 860, we’ve shed 18 points to close at 1022. We now have 5 consecutive days on the downside for the S & P, 7 in the Dow. Friday absorbed the employment data fairly well. In fact, with only a few minutes until the close, the averages had erased the session losses, but were caught in a wave of late-Friday selling that kept the arrows red. Perhaps surprising was that the Volatility Index, VIX, had a reversal day down on Thursday and then gapped and stayed down on Friday. The VIX moves opposite to the implied direction of the market. The 10-week moving average on the VIX is at 29.56 and it closed at 30.12. Keep an eye on the direction of the bears today. Last week, the Euro popped above its June closing high of 1.2389. It has a cushion at 1.2544, but as a proxy for how the EZ is fairing, keep an eye on the Euro this week as well. Since we don’t have much to watch, we’d be happy with a consolidation week with a bullish bias for these four days.