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U.S. Jobs Report – Market Consequence

10/10/2011
Last Friday morning, October 7, the U.S. Labor Department released figures for the monthly jobs report.  I would characterize the report as further evidence that a second recession will be avoided. However, the report also suggests that the U.S. will continue to struggle with a structural unemployment problem far longer than originally estimated.
 
•         Headline jobs added 103,000, ahead of the 60,000 estimate and last month’s zero jobs growth.
•         Private jobs added 137,000, ahead of the 90,000 estimate and last month’s 17,000.
•         Unemployment rate was unchanged at 9.1% (vs. estimate of 9.1%).
•         Prior month’s headline jobs number was revised higher, from zero to 57,000 new jobs added.
•         Prior month’s private jobs number was revised higher, from 17,000 to 42,000 new jobs added.
•         Construction jobs rose 26,000, the largest monthly gain since February.
•         Factory jobs fell 13,000, the largest monthly decline in 13 months.
•         Service provider jobs rose 85,000, the largest gain in 5 months.
•         Average hourly earnings rose 0.2% to $23.12, after last month’s -0.2% decline.
•         Average weekly hours rose to 34.3 from 34.2.
 
Market consequence – It remains prudent to position defensively, expecting to assume more risk if corporate earnings beat the lowered expectations. In defiance of those calling for a market meltdown and the need to be positioned in cash, I view the market price action since Tuesday afternoon, October 4, as constructive. Both the S&P 500® Index (Fig 1.1) and the 10-year Treasury (Fig 1.2) traced out significant price reversals that provide a more constructive view of risk assets, and, more importantly, a well-defined point of reference to determine if my expectation is incorrect.
 
The market now enters the critical earnings period. Earnings estimates have been lowered over the past few weeks. I expect corporations to exceed those expectations but guide rather conservatively for the next quarter due to the acknowledged “crisis of confidence.” Overall, a “beat and caution” theme for the season will not be enough to send the S&P 500 Index on a significantly higher path of appreciation but will be enough to challenge last year’s close of 1257.64. Watch the relationship between equities and Treasuries as the leading indicator.
 
Fig 1.1 S&P 500 Index, 7/25/11-10/7/11

Source:  Bloomberg

Fig 1.2 U.S. 10-Year Treasury, 8/25/11-10/7/11

Source:  Bloomberg

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