MarketView for August 7

 

 

Summary  

 

Stock prices moved sharply higher again on Friday after the July jobs report came in much better than expected and adding to the ongoing belief that we are starting to pull out of this long and steep recession. Before the opening bell, government data indicated that the unemployment rate fell in July for the first time in 15 months as employers cut fewer-than-expected jobs, coming in at 9.4 percent in July from 9.5 percent in June.

 

The Labor Department also reported that employers cut 247,000 non-farm jobs in July -- far less than the 320,000 expected and the smallest decline in a year. The data sent share prices higher across the board as all three key equity indexes closed out their fourth week of gains. The S&P 500 index closed at a 10 month high.

 

The economy's improving outlook helped out the financial sector, with JPMorgan Chase closing out the day with a 4 percent gain at to $42.36 and ranking among the stocks contributing the most to the gain of the Dow Jones industrial average. Adding to the positive tone, AIG posted its first quarterly profit in seven quarters, and its stock closed up 20.5 percent at $27.14. Among the Nasdaq's key advancers, graphics chipmaker Nvidia rose 4.5 percent to $13.71 a day after it forecast third-quarter revenue above expectations.

 

For the week, the Dow was up 2.2 percent, the S&P 500 was up 2.3 percent and the Nasdaq was up 1.1 percent. The S&P 500 is now up about 50 percent from its 12-year closing low in early March, helped by stronger-than-expected corporate earnings and a string of economic data that has suggested a recovery.

 

Retailers' shares rose for a second day, despite reporting on Thursday their 11th straight month of sales declines. Next week, a slew of retailers are expected to post quarterly results as the earnings season comes to a close. About 73 percent of the S&P 500 companies so far have beaten analysts' earnings expectations.

 

The Employment Picture Begins To Finally Improve

 

The unemployment rate fell in July for the first time in 15 months as employers cut 247,000 jobs in July, the Labor Department said on Friday, the least in any month since last August, taking the unemployment rate down to 9.4 percent from June's 9.5 percent. The report also provided the

clearest indication yet that the economy was turning around from a deep recession.

 

Recent data ranging from home sales to manufacturing have pointed to an economy starting to dig itself out of one of the worst recessions since the Great Depression of the 1930s. President Barack Obama, who has seen his standing in public opinion polls slip as Americans fret about the weak economy and high unemployment, said July's jobs report showed the worst "may be behind us." But he cautioned there would be no true recovery as long as the economy continued to shed jobs.

 

Analysts had expected nonfarm payrolls to fall by 320,000 in July and the jobless rate to hit 9.6 percent. The government also revised data for May and June to show 43,000 fewer jobs were lost than previously reported.

 

The easing in the unemployment rate could have been the result of the labor force shrinking by 422,000 in July, far more than the 155,000 decline in June, suggesting some jobless workers may have given up looking for work. In the United States, for the purpose of calculating the unemployment rate, the labor force is defined as those with a job plus those out of a job but actively looking for work.

 

While employers cut fewer jobs than forecast, unemployment remains stubbornly high, meaning households have less income to spend and little borrowing capacity. Federal Reserve data on Friday showed consumer borrowing sank $10.3 billion in June after dropping $5.4 billion in May.

 

Since the start of the recession in December 2007, the U.S. economy has shed 6.7 million jobs, the Labor Department said, adding that 14.5 million people were unemployed in July. In that month, a record of about 5.0 million Americans had been without a job for more than six months.

 

However, in a sign that the labor market deterioration was slowing, a gauge of labor market slack that measures both the unemployed, people working part-time for economic reasons, and those only marginally attached to the labor force; fell to 16.3 percent in July from a record high 16.5 percent in June.

 

Job losses in July were spread across all sectors, but the pace of firings slowed markedly from previous months. Manufacturing employment fell by 52,000 after shrinking by 131,000 in June. This was the first time since September that manufacturing job losses were less than 100,000 and was likely due to the reopening of General Motors and Chrysler assembly plants after the two automakers emerged from bankruptcy.

 

Payrolls in construction industries slipped 76,000 after falling 86,000 in June, probably reflecting spending on infrastructure projects from the stimulus package and a modest pickup in ground breaking for new homes.

 

In the services sector, 119,000 workers were laid off, and goods-producing industries lost 128,000 positions.

 

Education and health services continued to add jobs though, with payrolls increasing 17,000 in July after rising 37,000 in June. Government employment increased 7,000 after slipping 48,000 in June. Leisure and hospitality added 9,000 jobs.

 

The average work week, considered a good leading indicator of an economic upturn, inched up to 33.1 hours in July from 33.0 in June. The average work week in the manufacturing sector rose to 39.8 hours from 39.5 in June, the department said. Average hourly earnings rose three cents to $18.56.

 

Crude Down

 

Oil fell from six-week highs on Friday, pressured by gains in the dollar following the release of the better-than-expected U.S. job-loss numbers. Domestic sweet crude futures for August delivery settled down $1.01 per barrel at $70.93. London Brent crude settled down $1.24 per barrel at $73.59 a barrel.

 

The decline in crude prices came as the dollar gained against the euro and the yen, putting pressure on commodities denominated in the greenback. The economic crisis has reduced fuel demand. As a result, it is estimated that there are around 70 million barrels of crude oil being stored at sea. While the estimates vary from around 60 million to 100 million barrels, it is expected that offshore storage levels rose by around 10 million barrels in the last two weeks alone.

 

Fill Up for Clunkers

 

The Senate approved and sent to the White House on Thursday a $2 billion extension of the "cash for clunkers" autos sales incentive program. The measure, approved by 60 to 37, extends the successful program that has raised sales of the U.S. auto industry. President Barack Obama is expected to sign it quickly.

 

The initial $1 billion of funding approved in June for "clunker" business has generated more than $920 million in rebates and more than 220,000 in auto sales. Supported by the incentive program, auto sales overall were down about 12 percent in July from a year earlier, but it was their best performance this year.

 

The program offers consumers a federally backed rebate of up to $4,500 if they trade in old vehicles for new, more fuel efficient ones. Supporters of the extension defeated several Republican amendments aimed at derailing the plan in the Senate.

 

Major automakers said in a letter to senators the current $1 billion program has helped their companies, suppliers, scrap yards, steel producers and other small businesses.

 

"There is no question that 'cash for clunkers' has succeeded," said Dave McCurdy, chief executive of the Alliance of Automobile Manufacturers, the chief trade group for General Motors Co, Chrysler LLC, Ford Motor Co, Toyota Motor Corp and other big carmakers.

 

Domestic and overseas manufacturers have so far split the "clunker" market. More fuel efficient passenger cars have outsold sport utilities, pickups and vans.

 

The House of Representatives passed the $2 billion extension on July 31. The Senate took a week to affirm that action. The outcome reflected the national reach of the auto industry and related businesses, and the persuasiveness of dealers who employ thousands and contribute generously to political campaigns.

 

Economists see the "clunker" program boosting third-quarter growth, and several firms including Goldman Sachs have recently raised their GDP forecasts.