Sunday, July 10, 2011

US markets fall on dismal June payrolls report

US markets fell on Friday on dismal June jobs data. The S&P 500 dropped 9.42 points or 0.70% to 1,343.80. The Dow fell 62.29 points or 0.49% to 12,657.20. For the week, both indexes rose, with the S&P 500 rising 0.3% and the Dow gaining 0.6%.

On Friday, it was reported that June US non-farm payrolls added only 18,000 jobs, far lower than the 90,000 that economists expected. Job growth was the slowest in 9 months. In addition, the US unemployment rate rose 0.1% to 9.2% in June.

Bad news continue in the euro zone

The euro zone had its share of bad news this week. Early in the week, S&P stated that the debt roll-over planned that French and German banks have agreed to would constitute a default by Greece. This was a blow for euro zone officials, who have been hoping that this plan would allow Greece to delay paying its debt.

On Tuesday, Moody's dropped its rating on Portugal by 4 notches, resulting in a junk rating for the country. After the situation in Greece had been temporarily resolved, it appears other PIGS nations will be in a spotlight.

On Thursday, the ECB raised interest rates by 0.25% to 1.50%. Economists reacted by saying that it would make borrowing costs even higher for troubled euro zone countries such as Greece and Portugal.

Rate hike and high inflation in China

On Wednesday, the Chinese Central Bank raised its interest rates by 0.25%, resulting in a 1-year savings rate of 6.56% and a lending rate of 3.5%. This was in anticipation of the June inflation data released later in the week.

In fact, on Saturday, China's June CPI was reported at 6.4%, higher than economists' expectations of 6.2%. It was also the highest inflation rate in 35 months.

Looking ahead to next week

The effect of the horrible US June jobs report should spill over to stock markets early next week. The report was an important one among the many economic data that have been reported in the past 2 weeks. It eliminated the hopes of some investors for a US economy that they hoped was slowly picking up strengthen.

Portugal's debt being given a junk rating shows that attention is being shifted from Greece to other troubled euro zone countries. Thus, the euro zone debt crisis will likely to continue to drag markets lower in the weeks to come. The ECB's decision to raise interest rates might have an immediate negative impact on Greece, Portgual, Ireland, Italy and Spain.

I expect US markets to head lower next week, primarily on Friday's jobs data and Saturday's inflation report from China. China's June inflation of 6.4% will cause concern among investors of further tightening, which would negatively affect oil and other commodities the most.

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