MarketView for August 3

Summary

The major equity indexes reached their highest point since early May on Friday, the result of a better than expected jobs report and renewed hope European authorities would act to contain the euro zone debt crisis. It was the fourth straight week of gains for the S&P 500 and the Dow Jones Industrial Average and the third for the Nasdaq. The S&P 500 had fallen more than 1.5 percent in the past four sessions as investor hopes for central bank stimulus measures faded. For the week, the Dow was up 0.2 percent, the S&P was up d 0.4 percent and the Nasdaq chalked up a gain of  0.3 percent.

The European Central Bank indicated on Thursday it may start buying government bonds again to reduce crippling borrowing costs for Spain and Italy, even if its head Mario Draghi indicated that any intervention would not come before September. Draghi's comments would indicate that new stimulus measures could arrive soon, giving a boost to the battered Spanish and Italian equity markets.

Yes, European Central Bank President Mario Draghi disappointed everyone on Thursday by not signaling immediate action to roll back the euro zone crisis, if you look at what is happening and the comments since then you could reason that help might still be in the offing.

The pace of growth in our domestic services sector edged up in July as new orders gained, but a measure of employment fell to its lowest level in nearly a year, according to an industry report released on Friday.

Meanwhile, the jobs numbers indicated that employers hired the most workers in five months in July, countering negative sentiment from several weeks of poor economic data. However, the figures were still not so strong that they would keep the Federal Reserve from providing more economic stimulus.

Bank shares, which would be among those to benefit the most from an improving economy posted strong gains.

Knight Capital saw its share price gain upwards of 57 percent to close at $4.05 as some major clients said they would resume trading with the embattled company. Knight lost $440 million after a software glitch flooded the stock market with errant trades on Wednesday. The weekly loss for the stock was about 60 percent. 

Dow component Procter & Gamble ended the day up 3.1 percent to close at $65.50 after the Company posted a higher-than-expected quarterly profit and said it would repurchase $4 billion worth of its shares this fiscal year.

LinkedIn rose 16 percent to $108.51 after Company reported higher-than-expected revenue and raised its full-year outlook as it pocketed more money from subscribers, services aimed at businesses and advertising.

According to Thomson Reuters data, of the 402 companies in the S&P 500 that have reported second-quarter earnings through Friday morning, 68 percent have beaten analysts' expectations, which is consistent with the past four quarters.

About 6.5 billion shares changed hands on the three major equity exchanges, a number that was slightly below the daily average so far this year of 6.75 billion shares.

Payroll Numbers are Good

Employers hired the most workers in five months in July, but an increase in the jobless rate to 8.3 percent kept prospects of further monetary stimulus from the Federal Reserve on the table.

Nonfarm payrolls rose 163,000 last month, the Labor Department said on Friday, breaking three straight months of job gains below 100,000 and offering hope for the ailing economy.

While the report gave talking points to Republicans and Democrats for the upcoming general election, investors on Wall Street shrugged off the rise in the jobless rate to a five-month high and snapped up stocks.

The unemployment rate rose from 8.2 percent in June, even as more people gave up the search for work and a survey of households showed a drop in employment.

The Federal Reserve on Wednesday sent a stronger signal that a new round of major support could be on the way if the recovery did not pick up. The labor market has slowed after posting some large gains during the winter.

The step-up in hiring, which exceeded expectations for a 100,000 gain, left many unsure  as to whether the Fed would ease monetary policy at the September 12-13 meeting as had been widely anticipated before the jobs report.

The increase in payrolls last month was confirmation the slump in job growth in the second quarter was largely payback for an unusually warm winter that had brought forward hiring into the early months of the year, economists said.

As such, this suggested that employment numbers for August could look more like last month, reducing the pressure for the Fed to take further action next month. So far this year, job growth has averaged 151,000 per month, almost the same as the monthly average last year, and roughly the amount needed just to keep the unemployment rate steady.

Even if the payrolls growth buys the Fed time in September, further monetary stimulus remains in the cards given the threat to the economy from a potential tightening in fiscal policy next year and the ongoing debt troubles in Europe.

A Reuter’s survey published on Friday showed most Wall Street economists still expect the Fed to pump more money into the economy this year via bond purchases.

Details of the household survey, from which the unemployment rate is drawn gave a downbeat assessment of the labor market, with the share of the population that has a job falling to near cycle lows.

The labor force participation rate or the percentage of Americans who either have a job or are looking for one, fell to 63.7 percent last month from 63.8 percent. That is a sign of low confidence in the labor market.

Data last week indicated that the economy grew at an annual pace of 1.5 percent in the second quarter, also far short of the 2.5 percent rate needed to keep the unemployment rate stable. The private sector again accounted for all the job gains, adding 172,000 new positions. Government payrolls dropped by 9,000, as cash-strapped local governments laid off teachers.

Construction employment dipped 1,000, despite a rise in home building. Manufacturing payrolls increased 25,000, largely because of fewer layoffs in the auto sector as manufacturers kept production lines running during the month.

Within the vast services sector, employment gains were fairly widespread. From retail to professional and business services, employers added workers. However, the momentum could slow. A second report showed the services sector grew modestly in July as new orders rose, but a measure of employment dropped to its lowest level in nearly a year.

Last month, temporary help services increased 14,100 after rising 21,100 in June. But hiring in the utility sector was restrained by a strike at a power firm in New York last month.

Average hourly earnings increased 2 cents last month, suggesting consumer spending will struggle to regain steam after it slowed sharply in the second quarter. In the 12 months to July, earnings rose 1.7 percent. The average workweek was unchanged at 34.5 hours.