The phenomenon of stocks rising on bad economic news has been a common occurrence recently as investors feel a weak labor market may spur the Federal Reserve to maintain its monetary stimulus policies and delay tapering plans. However, it does raise the question of how weak economic data needs to get before stocks would fall?
On a broader scale, the disconnect between stocks and the economy has also been driven by companies’ cost-cutting, which has resulted in profit margins rising to all-time highs and boosted the attractiveness of stocks. Of course, neither the Fed’s stimulus nor companies’ cost-cutting are sustainable measures over the long-term and soon markets will cease their positive reaction to negative news.
Unemployment Rate
Adding to the feeling of disconnect, Friday’s releases showed that the US unemployment rate fell to 7.3% in August, even though consensus expectations were for a 7.4% rate and fewer jobs were added than forecast. The decline in the unemployment rate was actually a case of good news being bad news. The drop was due to a shrinking labor force, meaning that fewer people are seeking employment. The smaller labor force can be caused by people becoming discouraged from seeking work, staying in college longer and changing age demographics. But its decline is masking weakness in the employment sector. Interestingly, data using the trendline average labor force participation rate [compiled by Zerohedge] shows that the unemployment rate actually rose from 11.2% to 11.4%.
M&A Activity
While US economic data has been inconsistent lately, some optimism can be taken from a rise in M&A activity. Last week Verizon announced a deal to take full control of its wireless unit from Vodafone while Microsoft said it will buy Nokia’s mobile phone business, pushing this year’s global M&A volume to $1.56 trillion [data from Thomson Reuters]. Total M&A was $2.6 trillion in 2012. Cash-rich companies seeking cheaper assets is a sign they are optimistic about growth and indicates a re-leveraging in the economy.
Eurozone
While Italy verges on further political turmoil as prime minister Enrico Letta stands firm in support of removing Silvio Berlusconi from parliament, there are some signs of stabilization in other periphery economies. Last week it was announced that Spain’s manufacturing sector grew for the first time since April 2011 according to an unexpectedly strong PMI reading of 51.1 (greater than 50 indicates expansion). Spain has also succeeded in lowering unit labor costs, thus boosting competitiveness and aiding its export market. While unemployment remains a major concern, at least it fell slightly in August to 26.3%, marking a decline for a sixth consecutive month.
Unemployment is even worse in Greece at 27.6%, but the rate of the economy’s contraction in the second quarter was revised lower last week to 3.8% from an initially estimated 4.6%. It was the best reading for Greece in three years and while there is no reason for cheer, it is some evidence of stabilization.
Syria
Market activity was heavily influenced by developments surrounding Syria last week and that is likely to continue in the near-term. President Obama will be seeking support from Congress for his military strike plans but it’s not clear what route he will take if there is a vote not to intervene. If a strike does go ahead, the reaction of Syrian allies will be crucial. Iran's deputy foreign minister is scheduled to visit Moscow next week to discuss Syria with Russian officials. Russia has already sent naval ships to the Syrian coast and anxiety looks set to escalate in the coming weeks.
Week Ahead
Upcoming US economic data will not bring much clarity to the Fed’s tapering date as the only releases are producer price inflation and consumer sentiment indices on Friday. However, political wrangling is set to begin as Congress returns from its summer break and gets set to tackle Syria and negotiate the federal debt ceiling. Elsewhere, China will release keenly-watched industrial production data on Tuesday and Europe will follow suit with its number on Thursday.
With such a variety of market-moving factors looming, volatility looks set to escalate and the nervousness of investors is evidenced through data that shows a $15.3 billion withdrawal from stock funds in the past three weeks and $7.7 billion in redemptions from Pimco’s flagship bond fund in August.
While Italy verges on further political turmoil as prime minister Enrico Letta stands firm in support of removing Silvio Berlusconi from parliament, there are some signs of stabilization in other periphery economies. Last week it was announced that Spain’s manufacturing sector grew for the first time since April 2011 according to an unexpectedly strong PMI reading of 51.1 (greater than 50 indicates expansion). Spain has also succeeded in lowering unit labor costs, thus boosting competitiveness and aiding its export market. While unemployment remains a major concern, at least it fell slightly in August to 26.3%, marking a decline for a sixth consecutive month.
Unemployment is even worse in Greece at 27.6%, but the rate of the economy’s contraction in the second quarter was revised lower last week to 3.8% from an initially estimated 4.6%. It was the best reading for Greece in three years and while there is no reason for cheer, it is some evidence of stabilization.
Syria
Market activity was heavily influenced by developments surrounding Syria last week and that is likely to continue in the near-term. President Obama will be seeking support from Congress for his military strike plans but it’s not clear what route he will take if there is a vote not to intervene. If a strike does go ahead, the reaction of Syrian allies will be crucial. Iran's deputy foreign minister is scheduled to visit Moscow next week to discuss Syria with Russian officials. Russia has already sent naval ships to the Syrian coast and anxiety looks set to escalate in the coming weeks.
Week Ahead
Upcoming US economic data will not bring much clarity to the Fed’s tapering date as the only releases are producer price inflation and consumer sentiment indices on Friday. However, political wrangling is set to begin as Congress returns from its summer break and gets set to tackle Syria and negotiate the federal debt ceiling. Elsewhere, China will release keenly-watched industrial production data on Tuesday and Europe will follow suit with its number on Thursday.
With such a variety of market-moving factors looming, volatility looks set to escalate and the nervousness of investors is evidenced through data that shows a $15.3 billion withdrawal from stock funds in the past three weeks and $7.7 billion in redemptions from Pimco’s flagship bond fund in August.
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