Tuesday, August 30, 2011
Stocks have made some impressive gains in recent days as some of the more extreme recessionary concerns have eased. Monday’s positive personal spending data for July was very helpful on that front. But we are hardly out of the woods yet.
The near-term economic picture remains quite uncertain, with the next few days bringing out a host of very consequential data points. The market’s directional thrust will depend heavily on how the economic picture unfolds through the rest of this week. On the docket today, we have consumer confidence data and minutes of the Fed’s August 9 meeting, both will be material to the market.
The rest of this week will give us a good sense of the state of manufacturing and labor markets in August. We will get the Chicago PMI tomorrow and then the national manufacturing ISM on Thursday. Regional manufacturing surveys are indicating a significant pullback in the ISM reading, likely pushing this key manufacturing gauge into recessionary territory.
The labor market appears to have held up quite well in the face of the manufacturing weakness, at least judging by the trends in the weekly jobless claims data. The rest of this week brings a lot of fresh labor market data, with the ADP report on Wednesday, Jobless Claims on Thursday, and the non-farm payroll report on Friday. Labor market disappointment will prompt this market to give back its gains of the last few days.
The most important report today will be the minutes of the August 9 FOMC meeting coming out this afternoon. These minutes will give us a better understanding of the discussion on two key issues that took place in that meeting. First, the Fed decided in that meeting to keep interest rates at the current near-zero level for two more years. It was this decision that prompted three dissenting votes by regional Fed presidents, likely on inflation grounds.
Second, the post-meeting statement had referred to a range of policy tools at the Fed’s disposal to promote economic growth in the context of price stability. There was some expectation in the market that Bernanke would discuss these ‘policy tools’ in his Jackson Hole speech last Friday, but we did not get that. We should know more after the release of the minutes of that meeting later this afternoon.
The market wants to handicap the Fed on the prospects for further quantitative easing. The Fed appeared to be laying the ground work for more action down the road in that August 9 meeting. They stated that the outlook for economic growth had soured, but inflation was subdued, and that the labor market was weak.
Inflation and jobs are part of the Fed’s dual mandate. We know that inflation has been running hot lately. It is very unlikely that the Fed will tip its hand on QE3 as long as inflation readings remain elevated. And this week brings a host of labor market data, with Friday’s non-farm payroll report for August as the most important. A strong jobs report will improve sentiment on the economy’s growth outlook. But a significantly weaker than expected number will likely be read as pushing the Fed towards further easing.
In corporate news, we had better than expected results from Dollar General (DG), while Winn-Dixie Stores (WINN) came short of expectations.
Sheraz Mian
Director of Research
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