Tuesday, July 31, 2012

Track Starts Friday, But Don't Forget the Jobs Report

The world's attention (and mine) has turned to the Olympics. The most outstanding performance so far was Mr. Bean's during the opening ceremonies. However, I'm really looking forward to the track & field events, which begin on Friday, the same day that July's jobs report is released. Economists are expecting an increase of about 100,000 in nonfarm payrolls. They also expect the unemployment rate to remain steady at 8.2%. However, last week's GDP figure portends weaker results. Real GDP increased at an annual rate of just 1.5% during the second quarter. This beat the expectations of some economists, but fell well short of the revised 2.0% growth figure for the first quarter, indicating a general slowdown in economic activity from Q1 to Q2. Particularly worrisome was the anemic 1.5% growth in personal consumption expenditures. That was down from 2.4% in Q1. Expenditures on durable goods actually fell 1.0%.

We'll get a better idea of what the jobs report might look when the ADP Employment Report comes out tomorrow. Although the ADP report is based on actual payroll figures, it does not always accurately predict what the nonfarm payrolls might look like. Over time, however, there is a strong correlation between the two. 

Initial jobless claims come out Thursday and the ISM Indexes will be released on Wednesday and Friday. These also have the potential to move the markets. The former gives us an indication of layoffs. While many companies are still reluctant to hire workers, layoffs appear to have slowed. As a result, initial jobless claims could be better than the expected 365,000. As for ISM, the manufacturing index is expected to come in around 50 while the services index is expected to be a bit stronger. Yet these are extremely weak expectations since any number below 50 suggests contraction. 

The S&P 500 rallied 3.6% from last Wednesday to Friday. That's a nice move, but the gain had nothing to do with outstanding economic results or corporate profits. On the contrary, the economy is still struggling and corporations are reducing guidance. But stocks are rallying on hopes that European leaders will finally get serious about addressing their problems and that the Federal Reserve is about to initiate a new round of quantitative easing. Rallies based on these kinds of expectations are likely to fizzle out. 

As for the Olympics, nothing is for certain. Yet if I had to put my money on just one athlete, it would be David Rudisha of Kenya in the 800 meters. He is the current world record holder. One of these days he may become the first man to break 1:40.