A swing and a miss or more like several at bat were had this week in terms of the central banks. I’m talking about both the Federal Reserve and the European Central Bank (ECB), both of which stand ready to do something, just not yet. Earlier this week, both institutions convened and it’s pretty safe to say that investors and traders were expecting at least one of them to spring into action.
In fact, expectations were rather high as the recent rash of economic data for both Europe and here in the U.S. pointed to further weakness. Those expectations were stoked by ECB President’s Mario Draghi’s comments last week that he would do whatever it takes to safeguard the euro’s future. Instead, he pledged to draw up a set of additional unconventional measures to preserve the common currency. Mr. Draghi also said the ECB is ready to restart its purchases of government bonds on the secondary market “when necessary.”
This swing and a miss sound very much like what we have been hearing on the home front. Federal Reserve Chairman Ben S. Bernanke has said several times now that the Fed stands ready to act should financial stresses from the European crisis escalate.
But the Fed chairman recently offered a gloomier view of the economy as the labor market showed no sign of improvement since its last meeting. While we await the July employment report due out Friday, job creation slowed significantly in the second quarter. Prospects for job creation remained subdued, according to the July 15 survey published by the National Association of Business Economics. More specifically, the survey found that only 22 percent of the company and trade-group economists surveyed reported rising employment in July, down from about 30 percent in the last three surveys and 42 percent a year ago.
Sifting below the headlines for several of the mainstream economic indicators that were reported over the past few weeks, job creation prospects do not look much better. Personal income rose in June, but personal spending remained flat in the month as consumers reigned in spending in favor of saving. The July reading for the ISM Manufacturing Index showed order activity contracted for the second consecutive month, while the employment component of the index dropped 8 percent month over month. Durable goods orders excluding aircraft fell 1.1 percent in June, the worst reading thus far in 2012.
Despite those economic slowdown sign posts, Fed officials reiterated that they will keep interest rates at 0 percent to 0.25 percent and do not expect the federal funds rate to rise until late 2014 at the earliest. All eyes and ears that watch the Fed are now waiting until Sept. 12-13, the Fed’s next policy-setting meeting.
The net effect of this lack of action resulted in a 1.5 percent slide in the S&P 500 over the last few trading days, while the Dow Jones Industrial Average fell nearly 200 points.
How we end the week will be determined by the aforementioned July employment report. Current expectations call for 105,000 to 110,000 nonfarm private sector jobs to have been added during June.
While ADP’s Employment Change Report for July reported that 163,000 private sector jobs were added during the month, there has been a huge disparity between ADP’s findings and those reported by the Bureau of Labor Statistics. For example in June, ADP’s findings indicated 172,000 private sector jobs were added. By comparison, the BLS’s June Employment Report showed only 84,000 nonfarm private sector jobs were added, down from 105,000 in May.
ADP aside, other indicators and surveys, such as Gallup’s U.S. Job Creation Index pointed to further weakening in July. In particular, the Gallup index slipped to +17 in July after hovering at or near +20 from April to June.
A miss on the July employment figures would make this a trifecta of misses and a mess for the stock market.
Here’s hoping that is not the case.
• Chris Versace is the editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.