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Ahead of Wall Street

Thursday, July 5, 2012

Surprisingly favorable labor market data on the home front ahead of Friday’s key government jobs report is a key positive indicator this morning, likely offsetting some of the negativity from the sub-par manufacturing ISM report earlier this week. Also providing a favorable backdrop for today’s trading action are announcements of monetary easing from three major central banks. We have the service-sector ISM reading on deck for release a little later, but I would think that this morning’s positive labor reports will be reassuring enough to offset any surprises from that front.
 
We have a lot of central bank action this morning, with authorities in the U.K, the Euro-zone, and China announcing easing measures. The European Central Bank (ECB) rate cut announcement was largely expected, the Bank of England’s expansion of its bond-purchase program wasn’t much of a surprise either, but the Chinese action is not only surprising but likely indicative of the authorities’ concern at the pace of deterioration in the economy. Let’s hope that the market finds China’s second rate cut in less than a month reassuring and not a sign of panic.

Reversing the negative  trend of the last two months, the monthly jobs report from Automatic Data Processing (ADP) came in better than expected. Since the ADP report tries to preview the monthly labor market report from the government’s Bureau of Labor Statistics (BLS), this morning’s positive read from the ADP will raise hopes of a positive print from the BLS tomorrow. For June, the ADP report is showing better than expected private-sector jobs of 176K and the tally May was modestly revised upwards to 136K from 133K. The biggest increase came from smaller firms, with gains in both goods producing as well as service sector employers. Manufacturing jobs were up 4K and by 8K in construction, modestly better than what the June manufacturing ISM report showed this week.
 
This morning’s initial Jobless Claims report is equally positive as it reverses the stalling trend of the last few weeks. Initial Jobless Claims dropped 14K last week to 374K, and the four-week average, which smoothes out the week-to-week volatility, dropped by 1500 to 385.8K. While the period for this week’s Jobless Claims data does not correspond with the survey period for tomorrow’s BLS report, it nevertheless provides a reassuring backdrop for tomorrow’s BLS report.

The expectation for Friday’s BLS report ahead of this morning’s ADP report was for headline gains of around 100K. While we may not see any upward revisions to forecasts at this late stage, but many would reasonably be looking for a positive surprise tomorrow. A BLS report tomorrow of above 100K jobs in June would not necessarily mean that the economy is growing at a higher pace than 2%. But it would definitely confirm that it is not weakening either. And that would be a net positive. The recent momentum on the housing front and the drop in gasoline prices are some of the bright spots for the U.S. economy, likely indicating that a growth rate in the 2% vicinity is very much sustainable.
 
In corporate news, Apple (AAPL - Analyst Report) is getting ready to launch of a smaller screen iPad in September, according to the Wall Street Journal. The new device could help the company cement leading market share position in the tablet space by warding off competition from Amazon (AMZN - Analyst Report) and Google who both have 7-inch devices. Microsoft’s (MSFT) new tablet, which hasn’t yet hit the market, has an even bigger screen that the original iPad. In other news, Macy’s (M - Analyst Report) reported weaker than expected June same-store sales numbers and provided a lower earnings guidance.

Sheraz Mian
Director of Research

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