The equity markets pushed higher as better than expected payroll data created momentum, which helped, continue the rally that began September 1. This will be the first up week in the past 6 weeks, and the risk on trade seems to be back in vogue. The S&P 500 Index closed up 14 points to 1104.
A much better than expected payroll number caught market participants off sides as many traders did not believe the strength of economic data points earlier in the week (ISM, Jobless Claims, Pending Homes Sales), and are now forced to cover short positions. The employment data was better than expected. The overall headline Non-farm payroll report was a loss of 54,000 jobs. The private sector added 62 thousand jobs, while the government sectors lost 113 thousand jobs. The July data was revised up to 107 thousand private sector jobs from 71 thousand initially. The unemployment rate ticked up to 9.6% from 9.5%. Manufacturing lost 27 thousand jobs and this was disappointing. The market had expected a 10 thousand increase. This is consistent with the moderation in the manufacturing sector seen recently. It points to a soft industrial output report. Construction added jobs (19 thousand) for the first time in a few months. Average hourly earnings rose a healthy 0.3%, which is favorable for income and consumption, and was definitely a position surprise. The U.S. economy has shed jobs for three straight months, though the losses in August were about half the 110,000 predicted by economists. July was revised to show overal layoffs to 54,000 followed an original estimate of a 131,000 drop in payrolls.
The euro zone service PMI came in a little better than the flash reading. The 55.9 headline compares with the 55.6 flash and 55.8 in July. Given the uncertain economic outlook, the market’s attention is really on the forward looking indicators, like new orders. In the non-manufacturing sector, new orders in the euro zone rose to 54.9 from 53.1 in July. Of note, Germany was a bit disappointing, coming in at 57.2 from 58.5 in the flash, but still better than the 56.5 in July. On the other hand, Italy, which had fallen below 50 in July popped back above in August (51.4). Spain was the weakest link with the first sub-50 reading since Feb. The euro zone remains a bifurcated economy. Just like the aggregate analysis conceals the largest deficits by Germany and the Netherlands surplus, so too does the aggregate analysis conceal the economic discrepancies. The debt market allows a clearer way to distinguish among the different members. When European officials claim, as they have recently, that there is no chance of a double dip, they seem to be cheerleading rather than offering a realistic assessment. Germany and the Netherlands are the bright spots and they are largely export driven, isn’t that a real vulnerability if the risk of a double dip elsewhere materializes? The US economy expanded sharply in Q4 09 and Q1 10. Europe nearly stagnated then. The US slowed markedly in Q2 and into early Q3. The euro zone expanded smartly in aggregate in Q2.