Last Friday, I mentioned on Fox Business that I thought the August labor report might have been an “aberration.” The number of new jobs created for the month was well below analyst estimates. I mentioned that “one month, does not create a trend.” We will watch the labor market numbers closely, as it is relevant to Fed policy making.
Investors reacted with surprising relief to a disappointing August employment report that showed jobs growth braked to an eight month low. The data shows that payrolls increased by just 142,000, after expanding by over 200,000 in July. Data from June and July was also revised downward, tempering optimism about the labor market recovery. However, even though growth slowed, underlying trends show that slack in the labor market is still slowly being taken up.1 Another positive bit of news is that what jobs were created came from areas like business services, health care, and construction – areas where job seekers can potentially find high-paying, career-oriented jobs.2
Why the positive reaction to disappointing news? This is a case of bad news being treated like good news; investors have been chewing their nails in recent weeks over the possibility that the Federal Reserve could end quantitative easing and hike interest rates sooner than expected. A poor labor market showing takes away some of that risk, giving relieved investors some stimulus to rally.
International & Geo-Political
In Europe, the European Central Bank (ECB) cut interest rates to the bone and announced a new plan to boost lending, neatly avoiding the discussion of whether to engage in a full-scale Fed-style quantitative easing program. If “QE-light” fails, the ECB may be forced to take on the debt of struggling states like Portugal and Spain to boost economic growth. Right now, the bank is counting on constituent governments to do their part by cutting taxes and engaging in economic reform.3 Will this be enough to boost Europe’s stagnant economy in the face of waning demand and economic sanctions against Russia? We won’t really know until next year.
The crisis in Ukraine continued last week, with Russians achieving control over the eastern half of the country, and Western leaders debating whether or not to take a more active military role in constraining Russian ambitions. While U.S. leaders are willing to show their displeasure through further sanctions, the European bloc, sensitive to their dependence on Russian energy, are more reluctant to act.4
The week ahead is slow on economic data until Friday, when analysts will get a look at retail sales, consumer sentiment, and business inventories, all important indicators of economic health. With investor sentiment so high, it’s quite possible that a bump in the road may cause stocks to temporarily turn downward in coming weeks as investors hit pause and take stock of their surroundings.
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