The Nitty Gritty Details:
Stocks opened solidly higher this morning following a stronger-than-expected jobs report from private payroll services provider ADP. Meanwhile, a drop in weekly jobless claims and solid same-store sales results from retailers also contributed to the positive tone. Market participants will continue to focus on deficit reduction negotiations in Washington, where reports have emerged that some progress toward compromise has been made. European markets are higher in mid-day trading this morning after the Bank of England held rates steady and the ECB raised rates, as expected. Asian markets closed mostly higher, though Tokyo’s marginal decline snapped a seven-day winning streak. Crude is solidly higher on the strong data and ahead of weekly inventory data, while supply concerns are lifting copper. Most key agriculture prices are higher as well, with the exception of wheat.
Looking back at Wednesday, the broad averages resumed their ascent despite some negative headlines, making the sixth gain in the past seven sessions for the S&P 500. Markets successfully digested Moody’s downgrade of Portuguese debt, China’s rate hike and a slightly disappointing ISM Services report, all of which cast doubt over the strength of the recovery in financial markets. Nonetheless, stocks “grinded out” modest gains, led by Consumer Staples, Industrials and Technology – an odd mix of cyclical and defensive sectors. The growth concerns did weigh on cyclical commodities, which were mostly lower, while silver and gold managed solid gains.
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down:
1. ADP employment report for June was way above expectations, suggesting upside risk to the June jobs report due out tomorrow. The ADP employment survey revealed that private sector employers added 157,000 jobs in June 2011. The May gain was revised down from 38,000 to 36,000. The gain in jobs in June was the 17th consecutive monthly gain in the series, the longest stretch of gains since mid-2007 (pre-recession). Not only was the 157,000 gain above expectations (70,000), it was also very close to the upper end of the range of expectations (40,000 to 170,000). The government’s nonfarm payroll jobs report for June is due out tomorrow at 8:30 AM ET. The market is looking for a gain of 125,000 private sector jobs in June. Today’s ADP report for June suggests there is upside risk to that forecast.
2. What is our expectation for GDP growth in the second half of the year? We are maintaining our view that the United States economy will post real GDP growth in the range of 2.5 to 3% for the full year (2011). Growth in the first half of the year was around 2% (at best), so we do expect an acceleration in growth in the second half of the year, and especially in the third quarter, when growth will get a boost from a large increase in auto production and a rebound in global economic activity as Japan transitions from recovery to rebuilding.
3. Municipal bonds at mid-year. Mid-year is also budget time for most states and all but two, Iowa and Minnesota, have officially signed into law new fiscal 2012 budgets capping an uneventful budget season. Fiscal 2012 budgets were balanced primarily via expense reductions with tax and fee increases used as a secondary measure.
4. It’s interesting to watch the varying policies of central banks around the world. The ECB raised rates, but probably will not act again until the fall. Meanwhile, the Bank of England, as expected, held rates steady. The policy meetings of two of the world’s most influential central banks today highlighted the ongoing divergence in central bank policies between emerging markets (where inflation, growth and policy rates are all rising) and developed markets (where inflation, growth and policy rates are generally steady to falling). Central banks of commodity producing and fiscally strong developed nations have been raising rates as well. Fiscally strong Sweden raised rates earlier this week (for the 7th time since 2010), and although Australia’s central bank did not raise rates at its policy meeting earlier this week, policy rates in that commodity rich nation have been moving higher for nearly two years.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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