US Markets Tumble on Weak June Jobs Report

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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.

 

U.S. Markets Post Biggest Gains of 2012 on Hopes of Spain Bailout

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U.S. markets rose on Friday, as investors expected Spain to ask the euro zone for a bailout on Saturday for its troubled banking system. On Friday, the S&P 500 climbed 10.67 points or 0.81% to 1,325.66. Meanwhile, the Dow gained 93.24 points or 0.75% to 12,554.20. For the week, the S&P 500 jumped 3.7%, while the Dow gained 3.6%.

One week after the S&P 500 lost 6.3% in May and dropped below its 200-day moving average, the index posted its strongest weekly gains so far in 2012.

Euro Zone Agrees to Bailout For Spain

Today, the 17-member euro zone has agreed to a 100 billion euro bailout for Spain's banks. This was larger than the amount that the market expected, and followed a 2.5 hour telephone meeting among euro zone finance ministers. On Friday, a report by the IMF had indicated that Spain needed 40 billion euros to inject into its banks. The bailout is likely to erase the market's concerns about Spain, at least in the short term.

Spain Troubles World Markets

Prior to Sunday's bailout announcement, the situation in Spain dogged U.S. markets for the entire week. On Friday, Fitch downgraded Spain 3 by botches, from A to BBB. The agency also gave Spain a negative outlook, meaning further downgrades are likely. In addition, Moody's warned that Spain and other euro zone nations were at risk of a downgrade. On Tuesday, following a meeting of G7 finance ministers, Spain indicated for the first time that it was asking for assistance from the euro zone.

China Cuts Interest Rate By Quarter-Percent

After a slew of data indicated a slowing economy in China, the country's central bank cut interest rates by 0.25% on Thursday. It was the first rate cut in 3 years, and caused markets to rally.

Ben Bernanke Offers No Hints of QE3

Testifying in front of the U.S. Congress on Thursday, Federal Reserve Chairman Ben Bernanke said the Fed was ready to take action, but offered no details or promises on a new round of stimulus. As a result, markets posted reduced gains following Bernanke's statements, after recording strong gains following China's rate cut.

Looking Ahead to Next Week

Markets will likely receive a strong boost on Monday, following Spain's 100-billion euro bailout. The focus in the euro zone will shift back to Greece, as investors anticipate the June 17 elections. Thus, U.S. markets are likely to head higher this coming week.

Investors will also be paying attention to China, with recent data indicating a slow-down in the economy. With May CPI in the country falling to 3%, it gives policy makes room for stimulus. Thus, investors will look for hints of further stimulus in the country. In the U.S., economic data to be released in the coming week includes the PPI and retail sales on Wednesday. CPI and initial jobless claims are scheduled for Thursday. The Empire State manufacturing index, U.S. industrial production and the June reading of consumer sentiment from Thomson Reuters/University of Michigan are expected on Friday.