Thursday, September 8, 2011
We have plenty on the docket, with Bernanke and Obama making major policy speeches later today. We have interest rate decisions from the Bank of England and the European Central Bank, which came as expected. We also have the July international trade data, with the deficit number coming narrower than expected. And most importantly, we have the weekly Jobless Claims numbers that came a shade weaker than expected.
Weekly Jobless Claims increased by 2 thousand for the week to 414 thousand; the expectation was for a modest drop. The prior-week’s tally was revised upwards to 412 thousand from 409 thousand. The relatively more stable 4-week average increased by 3.8 thousand last week to 414.8 thousand.
Despite the modest miss this week, the claims level has remained fairly stable in recent weeks, unlike the deterioration that we saw in last Friday’s August non-farm payroll report. I am of the view that while the labor market remains quite weak, Friday’s jobs headlines overstate the softness. In any case, while we are not seeing any signs of improvement, there is no obvious sign of deterioration either.
The continued labor market weakness in an overall backdrop of soft economic readings increases the odds that the Fed will come out with something favorable. Bernanke’s speech this afternoon will be parsed for clues to the Fed’s next move at its two-day meeting on September 20th. In one policy option, generally referred to as ‘operation twist,’ the Fed will replace maturing short-term treasury and mortgage bonds on its balance sheet with longer-maturity instruments.
This is expected to bring down the yields on long-term bonds. In anticipation of this Fed move, coupled with the economy’s dire straits, the yield on the 10-year Treasury bond is currently flirting with the record low 2% level.
Media reports indicate that the president is expected to unveil a roughly $300 billion jobs program in his speech later this evening. It is difficult to envision in the current partisan deadlock that he can have Congress go along with new spending plans. But there could nevertheless be some common ground on tax issues.
The president is reportedly planning to announce an extension to the payroll-tax holiday that expires at the end of this year. He may also unveil a job-centric tax credit for employers. There is also talk of a temporary holiday for repatriation of corporate cash parked overseas at present. I am not very hopeful that these measures will get enacted.
In corporate news, we got better-than-expected results and positive guidance from Men’s Wearhouse (MW). Hovnanian Enterprises (HOV), the homebuilder, reported a narrower-than-expected loss, but its sales came short of expectations. Smithfield Foods (SFD), the processor of pork and other fresh meats, beat on EPS, but fell short of revenue expectations.
The market will likely remain tentative ahead of the major speeches by Bernanke and Obama, particularly given the solid gains on Wednesday. While the president’s speech comes after the markets close, Bernanke’s comments have the potential to generate some late-session momentum.
Sheraz Mian
Director of Research
Zacks Investment Research
