Weekly Outlook : 8-09-2021
Monday, August 09, 2021 7:59 AM

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The Month of August has had a rollercoaster ride as the beginning of the week saw a continuation of July's excellent performance. The market consolidated during the week, and was pushed lower after the Department of Labor reports a worse than expected employment report. Overall, the US employment picture was disappointing with a few positive aspects. For the week, the S&P 500 Index climbed 19 points or 1.9%.

Summary

Private sector pay roles gained a disappointing 71 thousand and the June figure was revised lower.  The headline lost 131 thousand and here too downward revisions in prior months.  The workweek increased and hourly earnings ticked up.  Manufacturing, education and health services grew jobs.    Expectations by economists were that the headline number would drop approximately 60 thousand jobs.  The service sector lost jobs for the second consecutive month and construction lost jobs.   State and local governments lost 48k jobs, while federal government jobs (census) lost 154k.  The implications are the report is mixed.  On one hand, the overall labor picture, which includes the downward revisions, will excite those that expect the Fed to renew asset purchases to support the economy.   The June data was revised down significantly. Payrolls fell 221,000 that month, more than the 125,000 drop previously reported, as only 31,000 jobs were added in the private sector. Taking into account revisions to prior months this year, the U.S. economy added an average of less than 100,000 jobs a month in the first seven months, a level that is not strong enough to bring unemployment down.  The jobless rate, which is calculated using a separate household survey, held steady at 9.5% in July. Economists were expecting it to edge higher to 9.6%.  Total government employment fell by 202,000 last month, hurt by the laying off the census workers and by 48,000 jobs lost in state and local governments, which have significant budget strains.  In a sign of the labor market's continued weakness, Friday's report showed that 45% of unemployed Americans, or 6.6 million people, were out of work for more than six months in July. The longer someone is without a job, the harder it is to find work.

Nonfarm payroll chart

This has seen the US 2-year yield fall to new record lows, for example.  On the other hand, the details were supportive.  The larger than expected increase in mfg employment and the longer work week suggests industrial output increased.  Income rose and this may help support expectations for a recovery in retail sales.

Also in a surprise, Canadian employment was weaker than expected.  The Canadian job markets has been growing robustly for the past 6 months, and July's report was the first hiccup.  The net change in jobs in Canada was -9.3 thousand compared to the 10.3 thousand that was expected and the 93.2 thousand that was created in the month of June.  Additionally, the unemployment rate ticked up to 8% from 7.9% expectations and 7.9% in the month of June.

Technical Picture

Despite a strong move in the equity markets in the beginning of the week, the S&P 500 index was not able to maintain footing above the 200-day moving average.  The disappointing employment picture put a damper on the upward momentum of the equity market and the MACD is beginning to confirm a slowdown in momentum.  The S&P 500 was able to hold above the 1100 mark, and continues to chop around in a 110 point 1130 - 1020 range.  Although the "death cross", when the 50-day moving average crosses below the 200-day moving average has little statistical significance, the "golden cross" when the reverse occurs, shows a lot of historical promise. The 50-day moving average has begun to turn, but is still 30 points below the 200-day moving average.

SPY Chart

The DAX, the German equity index, has climbed to a new 52-week high and looks poised to make further gains in the weeks to come.  The index had trouble near trend line resistance and but continues to trade above the 200-day moving average.

SPY Chart

Market Outlook

The market is trying to determine the severity of the implication given the disappointing employment data.  There were some positive aspects, but interest rates are down to levels that cannot be lowered, and the only stimulus will be further quantitative easing.  Next week the Federal Reserve will meet and the market will expect a statement that targets this issue.  Many investment banks have lowered (slightly) their growth projections and further stimulus will be the only cure to the sluggish growth the US is experiencing.  The equity markets a likely to continue to tread water around this level, trading in a range between 1130 and 1070.  There will need to be negative surprises to push the market much lower than 1070, and there will need to be an impetuous to push the market higher.  The dollar continues to remain week as short-term interest rate differentials continue to move in favor of Europe, the UK and Australia.  With growth prospects looking weak in the US, this will continue to perpetuate.  This could help global companies with international exposure with their 3rd quarter earnings.  The commodity markets in the Grains sector moved up dramatically this week, as Russia placed a ban on grain exports.  This run up will likely be unwound next week as there is a plethora of US grains to accommodate the demand.

Key Earnings And Economic Events

Monday: Tyson Foods Inc. (NYSE: TSN) and MBIA Inc. (NYSE: MBI) are on the earnings scoreboard.

Tuesday: Earnings from Walt Disney (NYSE: DIS), SunPower (NASDAQ: SPWRA), LDK Solar (NYSE: LDK), JA Solar (NASDAQ: JASO) will be in the spotlight.

On the macroeconomic front, investors are likely to focus on Federal Reserve's monetary policy committee meeting and subsequent interest rate announcement. The central bank's top rate-setting body is widely expected to keep interest rates at record lows to spur recovery.

Second quarter productivity and labor costs data are due for report at 8:30 AM. Economists expect productivity to increase 0.1 percent and unit labor costs to rise 1.4 percent in Q2.

Also on tap for Tuesday is wholesale inventories data for June.

Wednesday: Cisco Systems (NASDAQ: CSCO), Macy's (NYSE:M) are slated to report their earnings.

The April trade balance is due to be released by the government in the morning. The gap is expected to have widened to $42.5 billion from $42.3 billion in March. The trade gap measures the difference between imports and exports of both tangible goods and services.

The Treasury Department is scheduled to release federal budget for July in the afternoon. Economists expect a deficit of $169 billion in July, compared with $180.7 billion shortfall reported in June.

Thursday: Graphics chipmaker Nvidia (NASDAQ: NVDA), design-software maker Autodesk (NASDAQ: ADSK) and fast-food chain Wendy's/Arby's Group, Inc. (NYSE: WEN) are due to release quarterly earnings on Thursday.

The weekly jobless claims report from the Department of Labor is due in the morning. Roughly 465,000 Americans are expected to have filed new claims for unemployment last week versus 457,000 in the previous week.

The export & import price indexes for July, which measures the changes in the prices of goods and services traded between the U.S. and the rest of the world, are due out at 8:30 AM ET.

Friday: JC Penney (NYSE: JCP) and China TransInfo Technology Corp. (NASDAQ: CTFO) are scheduled to report quarterly results on Friday.

The Consumer Price Index for July is due before the opening bell. Economists forecast an increase of 0.2% for the headline figure and a 0.1% increase in the Core CPI.

The Commerce Department's July report on U.S. retail sales, due Friday, is forecast to show a small gain of 0.5 percent.

Friday's economic calendar also includes University of Michigan/Reuters consumer sentiment index and business inventories data.
 

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