PowerTrend Brief: Disappointing August Job Creation Means Waiting for the Fed

Last week the S&P 500 rose 2.75%, bringing the year-to-date return to more than 14%. The vast majority of last week’s move came on Thursday, following the announcement of the European Central Bank’s (ECB) Monetary Outright Transactions (MOT) program, as well as the bullish private sector job reading offered by ADP’s August Employment Report. A more disappointing, if not sobering, view on August job creation came on Friday from the Bureau of Labor Statistics (BLS).

Not only was the jobs figure a disappointing 96,000 — vs. the downwardly revised 141,000 in July — but the August data showed that wages remain stagnant and job creation year to date actually is below last year’s job growth. Specifically, year-to-date job creation through August 2012 has averaged 139,000 jobs, compared to 153,000 jobs during the same period last year. Sifting deeper into the BLS’s report revealed that more than 40% of those jobs created in the month were in low-paying fields. Also, the trend of downwardly revised job creation in prior months once again continued with negative revisions in both June and July.

While some observers were surprised by the BLS’s August jobs report, it did not surprise those who have been following several other indicators. One was Intuit’s (INTU) Small Business Index that showed far slower job creation in August than July. Typically, this report precedes those of both the ADP and the BLS by a few days. Another indicator to watch comes with the ISM Manufacturing Index, as well as the ISM Services Index. In both of its data releases, ISM includes both a new order component, as well as one for employment. On the manufacturing front, both new orders and employment have been contracting for several months, according to ISM’s report. The order weakness likely means that job creation in the manufacturing sector will remain, at best, restrained in the coming months. This was echoed in the Fed’s Beige Book report released last week that noted several Fed districts, including Boston, New York, Philadelphia, and Richmond, saw a softening in employment relative to expectations.

Aside from those data points, there have been several surveys and polls that have pointed to growing uncertainty, slowing growth expectations and a pause in hiring. Amid a backdrop of economic and political uncertainties, many employers do not plan to boost hiring or increase investment spending anytime soon. One such indication came from the August Wall Street Journal/Vistage Small Business CEO Survey. Per that survey, roughly half of nearly 800 owners of small businesses in the United States expect economic growth to remain sluggish in the year ahead.

As if confirmation that the job market continues to be stuck in first gear was not enough, we also learned that prospects in the euro zone and China also point toward slower activity ahead. In tandem with the announcement of its MOT program, the ECB also cut its growth forecast and raised its inflation expectations. Three months ago, the central bank forecasted growth between -0.5% and -0.3% for this year and 0 to 2.0% in 2013. Based on continued weakness, the ECB now sees gross domestic product for this year falling between 0.6% and 0.2%, with expectations for 2013 ranging between -0.5% and 1.4%. In terms of the bank’s revised inflation expectations, prices are seen ticking up even more so this year and next year than it had expected just a few months ago, which likely reflects higher food and energy costs.

Over the weekend, we learned that China’s industrial output grew the least in more than three years during August. China’s economic growth has slowed for six straight quarters and many expect the trend to extend to a seventh quarter when third quarter GDP data for 2012 is published. As a frame of reference in 2Q 2012, China’s GDP was 7.6%, its slackest in more than three years. Recent data suggests that growth for full year 2012 will be its lowest since 1999 and may fall below 8%.

With the Federal Reserve holding its next policy meeting this week, the market will be watching to see if the Fed eases further and, if so, how it intends to do so. As the saying goes, the devil is in the details. As we have seen in the past, these events more often than not tend to be “buy the rumor, sell the news.”

I continue to think the next several weeks in the market will remain volatile. As such, we’ll continue to position the PowerTrend Profits portfolio, accordingly.

Buckle up.

Sincerely,

Chris Versace
Editor, PowerTrend Brief

The Week Ahead

After a flurry of data late last week, this week starts off slowly and builds with six major economic data items coming this Friday. Those releases, which include August reads on retail sales, inflation, and industrial production, follow the Fed’s interest rate decision that is expected on Thursday (Sept. 13). As I mentioned above, the stock market will be waiting with baited breadth to see if the Fed will, indeed, further stimulate the economy, given sluggish job creation. With corporate earnings season essentially over for now, the Fed, and whatever action it takes, will be center stage this week.

Here’s a more granular look at what’s on tap this week:

Monday, Sept. 10
Consumer Credit (July)
Five Below, Inc. (FIVE)
Palo Alto Networks (PANW)
Shuffle Master Inc. (SHFL)

Tuesday, Sept. 11
Casey’s General Store (CASY)

Wednesday, Sept. 12
MBA Mortgage Index (Weekly)

Thursday, Sept. 13
Initial and Continuing Jobless Claims (Weekly)
Producer Price Index (August)
FOMC Rate Decision (September)
Treasury Budget (August)
K12, Inc. (LRN)
Pier 1 Imports (PIR)

Friday, Sept. 14
Retail Sales (August)
Consumer Price Index (August)
Industrial Production (August)
Capacity Utilization (August)
Michigan Sentiment Index (September)
Business Inventories (July)

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