(By Kevin Donovan) The first Friday of the month is the personal trainer for the markets these days. The most recent clearly cracked the whip and the bulls responded by breaking a pretty decent sweat with the Dow rising 217 points and notching its fourth weekly gain, its longest streak of the year.
The Bureau of Labor Statistics reported Friday that 163,000 net jobs were added to nonfarm payrolls in July, breaking the skein of sub-100,000 gains that marked the spring months after a relatively brisk hiring spree in the winter. But the jobs gain was far from the level needed to put a dent in the unemployment rate, which ticked up to 8.3% as more Americans entered or returned to the job market.
What's more, the Institute of Supply Management's twin indexes of manufacturing and non-manufacturing activity told us that the economy continues to hover at stall speed. The ISM manufacturing index stayed in contraction territory with a reading of 49.8% vs. 49.7% in June. The services index, however, signaled expansion at 52.6% vs. 52.1%.
Both of the key coincident indicators – the jobs number and the ISM reports – were released after the Federal Open Market Committee's mid-week decision to keep monetary policy unchanged. We still think the Fed is inclined to launch another round of quantitative easing to keep the struggling recovery afloat.
The Fed has to be concerned, we think, because two other indicators last week pointed out how thick are the tethers restraining growth.
The Conference Board said its consumer confidence index improved slightly in July to 65.9 from 62.7 in June. The week before, the Thomson Reuters/University of Michigan's final reading on its overall index on consumer sentiment fell to 72.3 from 73.2 in June. It was the second monthly decline and the lowest reading in 2012.
Meanwhile, the Bureau of Economic Analysis reported that personal consumption expenditures were flat in June even as personal income rose 0.5%. In other words, the savings rate went up, a good thing in the long run, but then we're all dead in the long run, as Keynes said.
This has all the hallmarks of a liquidity trap. Even with interest rates surely low enough to discourage leaving dough in savings accounts, the lack of inflation dampens the urgency to spend now before prices rise. The resulting shortfall in demand is peculiarly resistant to the Fed's usual cyclical tools, so twice it has printed more money by expanding its balance sheet with bond purchases. We thought a third round of this quantitative easing exercise would be announced at the FOMC's meeting last week, but the Fed stood pat while acknowledging a slowdown. Unless the data inspire confidence in a self-sustaining recovery that could withstand a shock from the Eurozone mess, we think the FOMC will act when it next meets Sept. 12-13 with the advantage of having the August employment statistics in hand.
This week has little on the calendar to chew on. Consumer credit for June, wholesale inventories, second-quarter productivity and unit labor cost and the trade deficit are not likely to inspire equities or bonds either way.
Eyeballs are more likely to be fastened on developments in Europe, as Spain weighs going hat in hand to the Euro authorities for a bailout.
On the earnings front, Chesapeake Energy (CHK), Walt Disney (DIS), Macy's (M) and News Corp. are among the bigger names slated to report second-quarter results.