Monday, July 30, 2012

Our Mfr. ISM Guesstimate, Dallas Fed Survey Disappoints, & more ...

This week will be a busy one as a lot of economic data is scheduled to be released, including personal income & spending for June, July ADP, weekly initial claims, July ISM (manufacturing and services), and the big one, BLS' employment report for the month of July.  The market jumped nicely last week thanks to continuing belief (or pure hope born of desperation) in a QE3 and Draghi's soothing words.  We think a QE is certainly priced in.  If any of the upcoming economic data turns out to be not too hot or not too cold, hopes of a QE and therefore the market will begin fading.

We are assuming release of economic data got off to a very cold start as the July manufacturing survey published by the Federal Reserve Bank of Dallas was very disappointing.  General business conditions index came in at -13.2 versus a +2.0 consensus, and down from June's +5.8.  The report was not encouraging (unless one is yearning for Bernanke and Draghi's helping hands, which we believe will not be effective in the long-term).  New orders, growth rate of the orders, unfilled orders, shipments and capex were all down.  Some what we believe to be bad combinations persisted - capacity utilization declined while wages jumped and employment went down.  The higher wages could be due partially to increasing hours worked.  However, with much lower capacity utilization and orders, we do not foresee an uptick in hiring.

The general business conditions for the next six months also dipped; down to -7.3 from 1.3 in June.  The forward index also included a decline in capacity utilization, new orders, order growth and employment.  Businesses expect hours worked and wages to go up, but again, we think they would rather pay current employees overtime than commit to more long-term fixed cost and hire more workers; not necessarily encouraging from an economic growth standpoint.

Manufacturing ISM, a market mover, will be released on Wednesday.  Our guesstimate is 48.0, which indicates continuing contraction.  The Street is estimating a return back to growth with an estimate of 50.1.

Lastly, we will provide an initial estimate of July NFP likely by tomorrow morning.  Given that one of the factors used to generate the estimate is the monthly ADP figure, we may have to adjust it slightly after the ADP is released on Wednesday morning.

S&P 500 remains in the black even after the disappointing Dallas Fed manufacturing survey.  Clearly, the market has faith in Bernanke.  By the way, CSTR, FB, NFLX, and XHB are down 5.06%, 1.33%, 2.72%, and 1.32%, respectively.

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