The Day Ahead: Stocks Higher Before Labor, Consumer Data
Equity futures are pointing upwards following four days of declines. Thirty minutes before the weekly jobless claims report, the S&P 500 is 6 points up, more than reversing the 3-point loss from Wednesday.
Some of the optimism may be based on the minutes from the Federal Reserve’s August monetary policy meeting, released yesterday. It was clear from the meeting that an accommodative policy stance won’t be tightened any time soon, which investors see as a boon. However, it’s a two-edged sword: policy will remain loose because central bank officials feel “considerable uncertainty” about the prospects for a strong economic recovery.
As for fiscal policy, Treasury Secretary Tim Geithner said yesterday it was too soon to remove the temporary policies directed at promoting recovery.
Looking ahead to today, the key releases concern the labor market and consumer spending, two areas crucial to any hopes of a V-shaped recovery. So while markets have been somewhat indifferent to fresh data recently, weekly employment claims and the ISM Services indexes should definitely grab attention.
Unfortunately, that attention won’t be a good thing. According to forecasts, new claims for jobless benefits are expected to remain above 550k per week, and the services index is expected to be in decline for the 11th straight month.
If forecasts are correct and markets trade on data today, the optimism in equity futures this morning could be a faint memory by the afternoon.
Key Releases Today:
8:30 ― With just one day to go before the monthly employment figures, the weekly Jobless Claims report could gain some extra attention, even though the figures don’t have any impact on Friday’s numbers. So far, the initial claims figures for August have been disappointing, as the 4-week average moved up to 566k compared with 560k in July. That’s still lower than the 616k weekly average in June, but the numbers have a long way to fall before they indicate any stability in the labor market.
“To head into autumn with claims still trending above the 550k mark would be an unwelcome positions, consistent with continued payroll losses on the order of 250k per month,” said analysts at High Frequency Economics.
10:00 ― Unlike its cousin index from Tuesday, ISM non-manufacturing index is not expected to hop into growth mode in August. The services sector is in distress as consumers switch to savings mode, owing to their reduced net household wealth, which leads analysts to believe that consumption is the missing link to a V-shaped recovery. The median forecast is for a score of 48.0, an improvement from the 46.4 score in July but the 11th straight month of contraction overall.
John Herrmann, president of Herrmann Forecasting, gave multiple reasons why the services sector is taking more time to recover than manufacturing.
“The Achilles heel of the US economy remains on the consumer-side of the economy: persistent, but slowing, job cuts; elevated leverage ratios; surging savings rate; endemic job uncertainty; foreclosures and delinquencies; and an overall aversion to discretionary spending.” He added: “We think the consumer turns positive very gradually over the coming two years.”
Similarly, HFE’s Ian Shepherdson said that there can be no meaningful improvement so long as the labor market continues to report massive payroll slashings month after month.
“Consumers account for nearly 90% of the private sector economy, and yet, with the stimulus program now half a year old, the underlying rate of increase in real spending is still less than 0.1% per month,” he said.
With one day to go before the Employment Situation report, expect the ISM’s jobs component to receive a lot of attention.
Treasuries:
No auctions from the Treasury today. The benchmark 10-year yield is down six-tenths to 3.30%.