Still have Faith in the Fed?

Today, initial claims were slightly higher than expectations, 409.00K versus 407.00K estimate. The smoothed out 4-week moving average increased by 1,750 to 410.25K. Although continuing claims fell, as we had expected, they did not fall below expectations. Continuing claims for week of Aug. 20 stood at 3.735MM, down 18K from the previous week.

ISM came in above expectations as we had assumed yesterday. 50.6 was slightly higher than our estimate and above the 48.5 consensus. There was no revision to the July figure. Also, as we expected, we saw contraction (below 50.0) in production, new orders and backlog. Although employment was below the previous month, it remained above 50.0. 

Other economic indicators released included July construction spending and Q2 productivity levels and unit labor costs. All of those figures came in worse than expected. Although the construction data was for July, most stocks in the industrial goods sector and construction industry reacted very negatively to the news. We note that there may be a bounce, a temporary bounce, in construction, mainly due to the Irene hurricane.  Also, although this was for Q2, we note that lower productivity and rising labor costs are not good news for the jobs market.

The Fed-driven rally did not continue today, even though the ISM headline figure was better than expected. This could be a sign that anticipation of further monetary easing was mostly priced in. And it could pave the way for a volatile market tomorrow (Fri. 9/2), which is the big labor data day, going into the official Labor Day weekend.  We note that some of that volatility could be discounted due to the upcoming job market speech by President Obama next week.

In terms of tomorrow's payroll numbers, we do not have an estimate. We must note that although the employment indexes for most manufacturing data were not at contraction levels, initial claims and ADP data did indicate that the official employment numbers may come in below expectations. As mentioned earlier in the week, as long as the payroll numbers are not significantly worse than expectations, stocks will likely remain flat or could go up in anticipation of a Fed move. An upward move became a bit more likely after today's decline. But again, overall, we are not really sure where those employment numbers will fall.