Is the Economy Losing Steam?
Another day, another underwhelming economic report. Today’s reading of weekly Jobless Claims data appears even more disappointing than what we saw yesterday from Automatic Data Processing (ADP). But the key number is tomorrow’s jobs report from the government’s Bureau of Labor Statistics (BLS), expectations for which have been coming down post-ADP.
Also in play in today’s trading session are interest rate decisions from the European Central Bank (ECB) and Bank of Japan (BOJ). The ECB decision came in as expected, with no interest rate cut despite the widespread economic pain in the currency union. But the BOJ more than came through with what the market was looking for.
The new governor of the Bank of Japan is leaving no stone unturned by taking a leaf out of the Bernanke playbook and announcing an aggressive easing program to fight entrenched deflationary expectations. Japanese stocks have been the best performing this year of all developed markets in anticipation of this BOJ move. But given the positive surprise in today’s announcement, they may have some more room to run.
Yields on Japanese government bonds were quite low to begin with, but will likely come down even further following this aggressive action by the BOJ. The Japanese Yen which had been weakening relative to the Euro and the dollar in anticipation of this move will likely fall some more. That’s a problem for Europe, which it’s rate decision today fails to address. Perhaps Draghi can paint a future outlook in his press conference that can anchor expectations. But hard to envision the markets responding to mere talk.
On the home front, today’s Jobless Claims numbers provide another worrying sign that the economy may be moving towards a ‘Spring Swoon’. Initial Jobless Claims jumped by 28K to 385K, erasing weeks of gains in one move. The consensus expectation was for a modest drop. The four-week moving average went back above the 350K level – increasing by 11.3K to 354.3K. The surprise jump could be due to seasonal adjustement issues related to Easter and the Spring break, but we will have to wait a couple of more weeks to decipher that.
Today’s disappointing data comes after the weak ADP and the two ISM surveys. The claims miss is not relevant to tomorrow’s BLS report as the survey week doesn’t correspond with the BLS survey period, but it is nevertheless a further sign that the economy may have started losing momentum in March after strong gains in the first two months of the quarter. As a result, expectations for the BLS jobs report tomorrow have started coming down from the original 200K.
I wouldn’t expect the market to resume its positive momentum in the absence of unequivocally positive economic data. That’s what we should expect to justify the market’s record levels. But what we are seeing instead is far from unequivocally positive, or even just positive. It’s actually negative. Let’s see what Friday brings.
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