Sunday, July 8, 2012

US Markets Tumble on Weak June Jobs Report

U.S. markets fell on Friday on a disappointing June non-farm payrolls report. The S&P 500 fell 12.90 points or 0.94% to 1,354.68. The Dow dropped 124.20 points or 0.96% to 12,772.47. For the week,
the S&P 500 fell 0.6%, while the Dow dropped 0.8%.

U.S. June Non-Farm Payroll Disappoints

Friday's US jobs report showed a gain of only 80,000 non-farm jobs in June, which was lower than the 100,000 that the market expected. The unemployment rate remained unchanged at 8.2%. In addition, it was the third consecutive month in which the increase in jobs was less than 100,000. In the second quarter, job growth averaged 75,000 per month, which was far weaker than the 226,000 per month growth in the first quarter. It was also the worst job growth for a second quarter in two years.

Federal Reserve Not Expected to Launch QE3 Imminently

Despite the weak June jobs report, and the weak job growth in the second quarter, most analysts believe that the numbers are not weak enough for the Federal Reserve to immediately launch QE3. Thus, they expect the Fed to continue with its $287 billion extension of Operation Twist.

Three Central Banks Take Action

On Thursday, China's central bank lowered its interest rate by 0.25%, while the ECB lowered its interest rate by 0.25%, resulting in a rate of 0.75%. In addition, the Bank of England increased the size of its quantitative easing program by £50 billion, resulting in a size of £375 billion. The action by the three central banks was to boost their respective slowing economies. The action by the ECB followed a June PMI reading of 45.1 for the euro zone, which was lower than the 50 mark that indicates contraction.

Spanish Bond Yields Remain Unsustainable

Before the three central banks took action, Spain held a bond auction in which its 10-year bonds were auctioned at 6.43%, which was higher than the 6.044% at the last auction. As a result, the yield on 10-year Spanish bonds rose to 6.842%. On Friday morning, following the action by the central banks, the yield on 10-year Spanish bonds remained elevated, at 6.78%.

US ISM Data Indicates Contraction in Manufacturing

On Monday, the ISM reported that its manufacturing index fell to 49.7% in June from 53.5% in May. It was lower than the 52.3% that the market expected. With a reading below 50%, it indicated that the US manufacturing sector is contracting for the first time since 2009.

Looking Ahead to Next Week

Earnings season begins next week, with earnings from Alcoa and JP Morgan. Investors will be paying attention to the size of JP Morgan's trading loss. Investors will also focus on the Fed's meeting minutes, which will be released on Wednesday, to see if there is any indication of a QE3. In addition, investors will watch China's GDP numbers, which economists expect to show a growth of 7.6%.

With U.S. markets little changed from where it was two months ago, better-than-expected earnings could send markets higher. In addition, any indication of a QE3 in the Fed's minutes would provide a boost to markets. However, with the Chinese Central Bank rushing to lower interest rates before its GDP report, the Chinese economy may have cooled more quickly than expected in the latest quarter. Spain will continue to affect the markets, but with investors now accustomed to high Spanish yields, the country is unlikely to affect markets in a significant way next week.


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