Friday, June 17, 2011
The favorable labor market and housing reports on Thursday notwithstanding, it is becoming clear that we will have to wait at least a few more weeks before expecting a trend shift in the nation’s economic fortunes. Add to this questions about China’s growth outlook, the debt-ceiling debate in the U.S., and the noisy Greek problem, and you have a fairly market unfriendly near term macro backdrop.
Current consensus expectations put the U.S. economy expanding at a 3%+ rate in the second half of the year, after the first half’s growth pace in the 2% vicinity. If this outlook has to transpire, the market will expect to see some evidence in the June data coming out early next month. The key reports would be the manufacturing ISM Index and the June non-farm payroll report.
Early indicators on these two reports are not reassuring. The Empire State and Philly Fed surveys for June, which are effectively regional previews of the national ISM report, were disappointingly weak. If the manufacturing slowdown is largely due to Japan-related issues in the U.S. auto sector, then it becomes difficult to explain the weakness in this non auto-centric region in June.
The labor market picture is becoming a little more promising following the pullback this week in the jobless claims data. If we can sustain this trend in the coming weeks and take the weekly claims number back under 400 thousand, then the odds of a positive monthly jobs number for June will improve signficantly. A lot of the current hand wringing about the pace of economic recovery will just melt away if the labor market gets back to its pre-May trend line.
We get some of these important reports in early July and then later that month second-quarter earnings season gets underway. I would expect stocks to largely remain in a wait-and-see mode till then, with an overall downward bias. This does not mean, however, that we will not get the occasional positive days in the market, like on Thursday.
Sheraz Mian
Director of Research
Zacks Investment Research
