Thursday proved to be the reversal of Wednesday’s more positive economic outlook and the sectors that had previously gained were hammered in yesterday sell off. The trigger for the sell-off focused on the worse then expected non-farm payrolls data. Investor’s have become accustomed to seeing positive surprises in economic data and optimism had returned particularly as Wednesday evidence from the global PMI data continued to support the view that the global economy was beginning to find some traction.
The sell-off seen in the US stock market yesterday was arguably an over-reaction to the unemployment news. Placing some context around the figures, unemployment data is a lagging indicator unlike the PMI data; the fall to 467K was considerably more then economists had expected but considerably better then the falls we witnessed up to April: (April – 519k; March -652: Feb -681 and Jan -741). Finally, even with the rise in the unemployment rate to 9.5%, for sometime market consensus has been focused on the rate surpassing 10%. As such, the continued deterioration in the unemployment data should not have been such a surprise with part of the sell-off in US stocks due to light volumes ahead of Friday’s bank holiday.
What yesterday’s price action did highlight, again, is how much good news has already been priced into the markets. Although the “green shoots” are still showing signs of life the economic recovery is fragile and it is likely to be a longer then currently expected. This fragility was again highlighted in the employment data with the average workweek falling to 0.8% in June. In Q2, hours worked fell 7.9%saar an indication that we are still likely to see a large decline in output.
Today, with the US holiday the UK market will be focused on whether the FTSE 100 will eventually break out of its 4225 – 4510 range. The risk today is for a downside break which would leave the door open for a retest of 4000. So far, every move lower has been meet with significant demand, with investors that have been sitting on the sidelines using to the dips as an opportunity to enter the market.
Sources: Reuters: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:
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