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.

 

S&P 500 Posts Best Weekly Gain Since December

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US markets posted mixed results on Friday, after the Thomson Reuters/University of Michigan consumer sentiment index for February posted a lower-than-expected reading. The index fell in February from 75.3 to 74.3, and was lower than the 76.0 that economists expected.

On Friday, the S&P 500 rose slightly by 1.57 points or 0.11% to 1,404.17. The Dow fell 20.14 points or 0.15% to 13,232.62. For the week, the Dow gained 2.4%, while the S&P 500 posted its 5^th consecutive week of gains.

Stress Test Results Boost Market

Most of the market's gains this week was on Tuesday, because of the results of the stress test on US banks and Fed Chairman Ben Bernanke's statement after the FOMC meeting. The stress test results indicated that of the 19 large banks tested, only 4 banks failed. Several banks were allowed to increase their dividends following the stress test. Following the results, shares of JP Morgan rose 7%.

US Federal Reserve Boosts Economic Outlook

Also on Tuesday, Federal Reserve Chairman Ben Bernanke issued a statement following the FOMC meeting. He improved the wording used to describe economic growth for the next several quarters, from “modest” to “moderate”. Meanwhile, monetary policy remains unchanged, with the current low interest rate to be kept in place until late 2014. A new round of QE was also not mentioned, and Bernanke reiterated continuing Operation Twist.

Looking Ahead to Next Week

With the S&P 500 having gained about 30% since October 3^rd, a 5-10% pullback is likely. In addition, there is concern that Portugal would need to have its debt restructured, since its debt have been at unsustainable high yields. Furthermore, a Greek election is expected in April or May, and the new government's ability to implement tough bailout conditions is in question.

Brent crude has rebounded to settle above $125/barrel this week, as Iranian exports will soon be restricted. The high price of oil presents another headwind for stocks. Thus, North American markets will likely trade sideways or head lower next week.

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US Markets Rise on Greece Bond Deal and Jobs Data

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On Friday, US markets received a lift from Greece avoiding a hard default and the better-than-expect February jobs number. The S&P 500 gained 4.96 points or 0.36% to 1,370.87. The Dow gained 14.08 points or 0.11% to 12,922.02. For the week, the S&P 500 gained 0.1%.

The Greek government announced on Friday that 83% of bond holders have accepted the bond-swap deal. With the activation of the collective action clause (CAC) the percentage of participants increases to 96%. The deal decreases Greece's debt by about $100 billion euros.

In addition, on Friday the U.S. government announced that 227,000 non-farm jobs were added, which was higher than the 210,000 the market expected. The February unemployment rate remained at 8.3%, meeting market's expectations. The market also received a boost from rumours that the US Federal Reserve is considering a new type of QE.

Greece Debt Classified as in Default

By Saturday, the ISDA has ruled that the bond swap deal is considered a default, while Moody's and Fitch have downgraded Greek debt to selective default. This activates about US$3.2 billion in CDS payments, but was largely brushed aside by markets on Friday.

China Decreases Growth Target

On Sunday, China decreased its 2012 GDP growth target from 8% to 7.5%. It was the first time since 2004 that the growth target had been lowered, and the news weighed on markets early in the week.

Looking Ahead to Next Week

The Fed's FOMC will meet on Tuesday, and issue a statement after. Investors will be looking for any sign of a new round of QE or operation twist (OT). Meanwhile, the Thomson Reuters/University of Michigan consumer sentiment data will be released on Friday. The market expects a reading of 76.0 for March.

The bond swap deal and the resulting triggering of CDS payments could have a negative effect for markets next week. In addition, investors with high hopes for a new type of QE will likely be disappointed Tuesday. Even if the Fed gives a hint about conducting a new type of QE, its size will likely be much smaller than QE2. Finally, markets will likely be pushed lower early in the week by China's weak February export numbers, and its largest monthly trade deficit in 22 years.