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Last Friday U.S. equity markets erased some of their early morning losses and rallied higher up to the closing bell despite the underwhelming results from the closely watched July employment report that showed 162,000 non-farm payroll jobs were added to the U.S. economy in July, missing estimates of 175,000 according to briefing.com.
The non-farm payroll number for June was revised lower to 188,000 from 195,000 and the unemployment rate in July fell to 7.4 percent from 7.6 percent in June.
The labor participation rate fell to 63.4 percent from 63.5 in June, causing some of the decline with the unemployment rate.
Personal income rose just 0.3 percent from 0.4 percent in June while hourly earnings declined to -0.1 percent from a .04 percent gain in June. Average work week fell slightly in July to 34.4 hours from 34.5 hours in the previous month.
Quantitative Easing III (QE3) Impact: Bad Economic News is Good News For The Market
The S&P 500 and the Dow reached new record highs on Friday in a decidedly bullish equity market that reacted positively to weaker than expected U.S. economic data from the July employment report as investors bet that disappointing employment data for July could signal that the Federal Reserve is not quite ready yet to begin tapering in September with their $85 billion monthly purchases of bond assets (QE3) that has helped to drive interest rates lower and simultaneously provided a floor to U.S. equities, helping the S&P 500 to rise 16.91 percent year to date and 22.91 percent year over year since August 3, 2012.
Even with positive momentum in U.S. equity markets across 2013 there are still many investors who are waiting on the sidelines in cash after fleeing the bond market with fresh losses since many bond yields have jumped higher since May.
Fed Chairman Ben Bernanke’s testimony to Congress on May 22nd wherein he said the Federal Reserve could reduce its pace of quantitative easing later this year helped to spark a bond market selloff, resulting in interest rates moving higher and underscoring some risks that await the still recovering housing market that depends on low interest rates to entice more buyers.
Investors sitting on the sidelines in cash are waiting for a solid entry point in the equity market which closed at a record peak on Friday for the S&P 500 and the Dow and has not witnessed a significant market selloff in 2013.
Some equity private equity managers from Fortress Investment Group and the Blackstone Investment Group LP claimed last week- in advance of the July employment report- that now is the time to exit equities as the market reaches new record highs and interest rates rise. This story from Bloomberg explains some of their sentiment.
As U.S. corporate earning season winds down and investors attempt to digest a mixed bag of U.S. economic data, the future path the Federal Reserve plans to take with their quantitative easing program is becoming increasingly more murky to decipher and place big bets on.
This week two important Fed members will come into focus and provide the market with even more insight about their outlook on the economy and the Fed’s controversial quantitative easing program (QE III) which has transfixed the investment world.
On Monday Richard Fisher, President and CEO of the Federal Reserve Bank of Dallas, who is not known for having dovish views on quantitative easing, will deliver a speech on the U.S. economy from Portland, Oregon.
The following day on Tuesday Chicago Federal Reserve Bank President Charles Evans will speak at a breakfast.
One of the primary hurdles facing the U.S. employment picture are the prevalence of federal sequester cuts, automatic “across the board” spending cuts of $85.4 billion in the fiscal year that reduces federal spending over an 8 year period (from 2013 to 2021) by approximately $1.1 trillion compared to pre-sequester spending levels.
In June Congressional Budget Office (CBO) Director Douglas W. Elmendorf wrote that if the sequester were canceled, U.S. employment would see gains between 300,000 and 1.6 million in the 2014 fiscal year, ending Sept. 30, 2014.
U.S. Secretary of Labor Tom Perez issued a recent statement following last Friday’s July employment report wherein he urged Congress to support President Obama’s proposals for job growth, including plans to rebuild America’s infrastructure, invest in manufacturing innovation, create more incentives for clean energy, and increase U.S. exports.
Perez asked Congress to take more action in support of a “common-sense caucus” by helping the U.S. economy to grow through fiscal reforms that move away from sequester austerity.
“Congress should join the president in a ‘common-sense caucus’ so that government contributes to a growing economy. For too long, Congress has been single-mindedly focused on an austerity agenda that has kept us in an economic strait-jacket” Perez wrote.
“It’s time for a grand bargain for middle-class jobs” he wrote in concluding remarks.
However, as Congress prepares for another debt ceiling showdown in September, it may be overly optimistic to expect Congress to make any short term inroads with President Obama’s pro-growth agenda.
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