We made a positive start to the last quarter of the year on Monday with the U.S. manufacturing sector moving firmly in the growth column after staying in contractionary territory over the preceding three months. This is particularly significant as the U.S. reading bucked a worldwide trend evident from PMI readings from the Euro-zone, China and many other Asian markets.
Hard to tell at this stage whether the signs of renewed life on the factory floor represent a reversal of the preceding three months’ downtrend or is just a one-off data point. But the lingering positivity associated with the manufacturing release will have some bearing on today’s trading action as well. Unconfirmed reports of Spain finally asking for a bailout should also help.
We will get the much bigger service-sector ISM reading tomorrow, but the most important economic release this week is about the labor market that comes out Friday morning.
The September non-farm payroll report is expected to show payroll gains of 115K, modestly up from August’s 96K tally. A number along the expected lines would not be materially different from what we have become used to in recent months and would be further confirmatory of the lack of labor market momentum.
The jobs report from payroll processor Automatic Data Processing (ADP - Analyst Report) on Wednesday will provide us with a preview of the government release on Friday. But the recent track record of the ADP report has been less than stellar. In fact, the employment component of Monday’s ISM report showed strong gains, likely indicating the possibility of a positive surprise.
Beyond this week’s labor market reading, the key development of any significance to the market’s next move is the third quarter earnings season that ‘unofficially’ gets underway next week with Alcoa’s (AA - Analyst Report) release -- it ‘officially’ started with results from FedEx (FDX - Analyst Report).
I am not looking for any major surprises with respect to growth rates, beats and revenue gains. Given how low expectations are for the third quarter, we will likely see the actual results come a tad bit better relative to current expectations.
What would be most significant about the third quarter earnings season will be management guidance for the following quarter – the fourth quarter of the year. Unlike the third quarter, when earnings are expected to decline from the year-earlier period, the fourth quarter is expected to bring in a sharp earnings ramp-up.
These fourth quarter earnings growth expectations (and also next year’s) remain vulnerable to downward adjustments. And my sense is that the negative revision process will get into high gear as the third quarter reporting season gets underway next week.