EmailThe August employment report was bad enough that some market participants will think it was good. S&P futures suggest a modest up open.
The market reaction to the not-so-surprising European Central Bank announcement yesterday on bond purchases shows just how much equites are dependent on central bank actions rather than fundamentals. The recent economic and earnings news has clearly been disappointing, but has not bothered traders so long as central banks are perceived as providing liquidity support.
The August 96,000 increase in payrolls was far below expectations, which had been raised following the strong ADP report yesterday. The components were also very disappointing. The average workweek was unchanged at 34.4 after a downward revsion to the average workweek in July. Hourly earnings were flat, after a 0.1% increase in July. The lack of an increase in hours worked suggests weak employment gains in future months and no growth in earnings saps consumer buying power. This is not a good report - at least from an economic standpoint.
It may, however, raise hopes that the Fed will launch another round of quantitative easing at its upcoming meeting. And we have seen how central bank action can boost equity markets.
Another bad sign for earnings came this morning with Intel lowering guidance. This is an important bellwether for the tech industry (still) and, coupled with FedEx's warning, clearly underscores that third and fourth quarter earnings for many companies will be disappointing. This is particularly true for international companies.
It is a battle between rapidly deteriorating fundamentals and the belief that central bank action will boost equity prices through increased liquidity. The central bank argument is winning for now, but eventually the fundamentals have to improve or the summer rally will prove temporary.
Founder and Chairman, Briefing.com
