Thursday, June 7, 2012
Fed Chair Ben Bernanke is in the spotlight today as the market looks for any hints of further Fed support in his congressional testimony this morning. Expectations of some form of additional quantitative easing (:QE) have increased following the recent run of soft jobs reports. This morning’s weekly Jobless Claims report further confirms that trend.
Beyond U.S. shores, we have an interest rate cut announcement from the Chinese central bank, indicating that monetary authorities in that country are getting ready to stimulate economic growth. On the European front, Spain held a successful government bond auction today, indicating continued strong demand for Spanish government bonds. While yield in this auction was higher than the one held in April, it was nevertheless modestly lower than the in the secondary markets.
This morning’s Initial Jobless Claims report is not so bad, but that is solely because recent data on that front has been so disappointing. It nevertheless further confirms the disappointing trend established by the last three monthly non-farm payroll reports. Initial Jobless Claims dropped by 12K last week to 377K. But since last week’s tally was revised upwards by 6K, the real drop is actually of 6K this week. The four-week average, which smoothes out the week-to-week volatility, increased by about 1.8K to 377.8K.
The only thing good about this reading is that it’s not that bad. The good thing on the initial claims front will be for this number to start going back towards the 350K level, but it is instead consolidating around 380K. This seems to indicate that the labor market has clearly lost the momentum that it was showing earlier this year.
I strong believe that these soft labor market readings are enough to trigger more QE from the Fed. Bernanke may not tip his hand on that issue in today’s testimony, but odds are about even that we will get something along those lines in the FOMC meeting later this month. We may hear him mention ‘growing downside risks to the economic outlook’ and the markets will likely take that as evidence of the Fed’s readiness to do more QE down the road.
I agree with those who question the utility of more QE in terms of actually improving the economy’s output, particularly given where interest rates already. But I don’t think that’s the key issue here. The issue is market sentiment and I strongly believe that the Fed does care about sentiment in the stock market.
In corporate news, we got weaker guidance from a host of operators this morning, including J.M. Smucker (SJM), Navistar (NAV) and Lululemon (LULU). Men’s Wearhouse (MW) did the same after the close on Wednesday.
Director of Research
Thursday, June 7, 2012