Night Reading

by CC July 5, 2011 1:17 am • Commentary


Economics/FedSpeak This Week


May Manufacturers’ Shipments, Inventories & Orders


Weekly MBA Mortgage Applications Survey

Weekly Johnson Redbook Retail Sales Index

June ISM Non-Manufacturing Index


June ADP Private Payrolls Forecast

Weekly Initial Jobless Claims

Weekly EIA Petroleum Status Report

Kansas City Fed President Thomas Hoenig Speech in Ada, Okla.


June Non-Farm Payrolls Employment Report

May Wholesale Trade Data

May Consumer Credit Data


Deutsche Bank:

We are upgrading our tactical view on equities to positive. On 4 March we turned tactically neutral from positive because of elevated consensus expectations for US GDP growth and rising geopolitical risks. Risks around oil have moderated, consensus growth expectations have been revised down sufficiently, and we are more bullish than consensus on the margin outlook. Consequently we upgrade our tactical view.

We expect the global economic recovery to regain traction in Q4. The weakness to date has been due partly to temporary factors such as the higher oil price and the tsunami that struck Japan. As the impact of these temporary factors fades, the continued improvement in new borrowing should sustain real GDP growth at rates above trend.


All seems right with the world once again.

The stock market comes into the week on a furious five-session winning streak, recording its best percentage gain in about a year. The Dow Jones Industrial Average gained 5.4% to 12582.77, its best weekly percentage move since July 2009.

On Friday, it seemed that the bears felt they had no dog in the fight, with most stocks heading higher, led by economically sensitive shares. A stronger-than-expected ISM Manufacturing report, coupled with Greece moving back from the headlines, helped restore a bullish tone to trading.

In addition, the long-awaited second-quarter earnings season is now in sight. Alcoa reports next Monday, kicking off the parade, and analysts are upbeat. Earnings estimates have risen 0.9% for the S&P 500 during the quarter, and another quarter of double-digit earnings growth is expected.

Before that, however, the market will have to determine if last week’s gains were a blow-off or the start of something else. After a three-day weekend thinking about the end of the Fed’s QE2 asset-purchasing program, more sober minds may arrive at trading desks.

The big attraction this week is Friday’s June employment report. Despite the market huzzahs of the previous week, few expect a very robust report. We’ll get hints on Thursday with the ADP Private Payrolls forecast. Another round of weak jobs news could bring the Slow Patch gang back to the forefront.


Major world markets rallied again last week, with most making exceptional gains to close the second quarter and start the new month. The S&P 500 and FTSE 100 were both up more than 5%, the DAX more than 4%, and the SENSEX gained almost 3% on top of its 2% rally the previous week. The Nikkei and Hang Seng also recorded strong back-to-back weekly gains. The laggard Shanghai also finished in the green, up half a percent, following a nearly 4% gain the week before.


IT HAS been almost two weeks since the International Energy Agency (IEA) announced it would release 60m barrels of oil from its member governments’ reserves, apparently in response to “ongoing disruption of oil supplies from Libya”. How is that working out?

If the intention was to reduce prices in the medium- or long-term, it has failed. The price of Brent crude fell $5 on the announcement but has rallied since. The price of West Texas Intermediate (mainly produced in America) is trading higher than before the IEA announcement


During the day on Friday, we noted that the Consumer Discretionary sector was getting very close to a new bull market high.  As shown in the first chart below, the sector did indeed make it to a new high by the end of the day.  Another index that made a new bull market closing high on Friday was the Dow Jones Transportation Index.  A week ago, investors were in despair over the struggling economy and down stock market.  A week later, two of the most cyclical sectors of the economy are back to new highs.  Pretty incredible.

Calculated Risk

The key report for this week will be the June employment situation report to be released on Friday.

The following table summarizes some of the grim labor statistics and compares the current situation (May 2011) with the employment situation when the recession started (December 2007).

Since December 2007, the U.S. working age civilian population has increased by 6.157 million people – however the number of people saying the are in the labor force has actually declined.

Total nonfarm payrolls are still 6.94 million below the December 2007 level, and private payrolls are 6.69 million lower.

Some of the decline in the labor force participation is due to an aging population, but these numbers suggest the U.S. needs 6.94 million jobs, plus some percent of the increase in the labor force, to get back to the 2007 employment situation.

On unemployment, perhaps the most staggering number is the 6.2 million workers who have been unemployed for 27 weeks or more.

Recoveries following a housing/credit bubble and financial crisis are usually sluggish – so these numbers are not a surprise – but this is a reminder that the top priorities for policymakers remains jobs, jobs and jobs.