Thursday, August 4, 2011
The economy remains in the spotlight as the news flow of the last few days has painted a less than flattering picture of the recovery. We now know that the manufacturing and service sectors lost ground as they entered the third quarter. We will have the full picture of the economy in July after Friday’s non-farm payroll report. This morning’s weekly Jobless Claims report gives us a flavor of what is going on in the labor market.
The market will also be digesting developments in Europe, where the European Central Bank (ECB) left interest rates unchanged. The market’s focus has clearly shifted to Italy and Spain as these two countries struggle with their weak finances.
On the U.S. labor market, weekly Jobless Claims came a tad better than expected at 400 thousand. The prior-week’s 398 thousand level, which by the way was the first under-400 thousand number in a long time, was revised upwards to 401 thousand. The four-week average came down, but stayed firmly above the 400-thousand level.
Not to split hair, but this morning’s report means that we have not gone below the key 400 thousand level since early April. The only positive I see in this report is that we did not go significantly higher. I guess the absence of a negative will count as a positive these days.
With respect to Europe, the market’s concerns have now clearly engulfed Italy and Spain, where yields on government bonds have been on the rise lately. But the decision by the European Central Bank (ECB) today to leave interest rates unchanged had less o do with the problems in these two countries and more due to a subdued inflation outlook in the core economy of Germany.
In fact, recent data coming out of Germany, France, and Netherlands is painting a picture of decelerating economic growth momentum. These three economies combined account for roughly half of the Euro area’s GDP. So, a decelerating growth trend enables the ECB to hold off on further rate increases after two hikes earlier this year.
This ECB interest rate outlook, coupled with what is going on in Italy and Spain should keep the common currency’s exchange value under pressure. No doubt, the Swiss and the Japanese are struggling to keep the appreciation in their currencies from hurting their export sectors.
On the earnings front, we had a solid EPS and revenue beat from General Motors (GM). Kraft (KFT) raised its outlook for the year and announced plans to split itself into two companies. Southwest Airlines (LUV) missed top- and bottom-line expectations. In other corporate news, we got better than expected July same-store sales numbers from Macy (M) and Target (TGT).
With the market waiting for Friday’s jobs report, I don’t see anything in this morning’s reports that can help reverse the recent losing trend.
Sheraz Mian
Director of Research
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