Thursday, June 23, 2011
Stocks will likely continue to reflect what Bernanke said, or didn’t say on Wednesday even as we got another negative labor market report this morning. The weak growth picture emerging out of the Fed chief’s news conference and today’s Jobless Claims report will likely force stocks to give back the gains of the last few days.
I discuss the disconcerting aspect of what the the Fed chief said Wednesday below, but let’s look at this morning’s weaker than expected labor market report first.
Jobless Claims increased 9 thousand to 429 thousand, while the four-week average remained unchanged at 426 thousand. This is the 11th week running that the jobless claims number has remained above the 400 thousand level. Today’s number is a reversal of last week’s report and takes us back to the negative upward trend that we have been consistently seeing since early April. This does not bode well for the June non-farm payroll report coming early next month.
With respect to the Fed, it delivered as expected on most issues. It left interest rates unchanged, announced the end of QE2, and reiterated a positive economic outlook for the second half of the year. Importantly, the Fed did not tip its hand on another round of monetary stimulus.
But one negative thing stood out for me in the Fed chief’s news conference and this pertained to the causes of the onging weakness in the economy. Everybody, including the Fed, expects the weakness to be temporary and restricted to the first half of the year, with ‘normal’ growth resuming in the second half of the year. The consensus narrative assigns the blame for the weakness to factors such as Japan, high fuel costs, and inclement weather.
On Wednesday, the Fed chief came across as tentative and uncertain in explaining the causes of the softness. Granted, he did mention the above referred factors (Japan/Fuel), but stated that they were ‘partly’ to blame. Here is a direct quote of what Bernanke said on Wednesday, as reported by the Wall Street Journal:
"We don’t have a precise read on why this slower pace of growth is persisting………………….Maybe some of the headwinds that had been concerning us, ike weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, some of these headwinds may be strong or more persistent than we had thought.
This is a far less benign take on the ongoing economic weakness than a few transitory factors holding us back. if the causes of the slowdown are more structural and enduring, then we may have to recalibrate our growth outlook for the rest of the year.
Aside from Fed watch and the labor market report, we also have a few earnings reports this morning. Congagra (CAG) modestly missed on earnings, but beat on revneues. Rite Aid (RAD) beat both earnings and revenue expectations, while homebuilder Lennar (LEN) came ahead of expectations. Oracle (ORCL) reports after the close today.
Sheraz Mian
Director of Research
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