Investors Brace for a Temporary Soft Patch in the Economy

George Brooks |

Investors Brace for a Temporary Soft Patch in the EconomyInvestor’s first read      - Brooksie’s edge before the open

Friday, May 4, 2012        9:15 a.m. ET

DJIA: 13,206.59

S&P 500:   1391.57

Nasdaq Comp.: 3024.30

Russell 2000: 806.64

TODAY: Oil is getting hammered again,  Softness in European economies and  action by the world’s largest futures exchange, the CME Group, to raise margin rates on speculation in oil and other futures stands to drive prices lower.

It’s Friday and uncertainties loom from abroad over the weekend, so a pullback would make sense, as traders even up positions and head out for a nice weather weekend.

Just by default, I can see slippage in the DJIA to 13,110 (S&P 500: 1381) with a little buying at the close.

“It” came at 8:30 today.  The report the Street has  impatiently waited for a month – the Employment Situation Report, seemingly the red light/green light signal for investors trying to decide if the economy is a “GO” or “No Go.”

The number was weaker than forecast, but the stock index futures edged up after the report.

How so ?

The market wasn’t rattled  by April’s new hires coming in at 115,000 because the March number  was revised up from 120,000 to 154,000, suggesting reports this time of the year are misleading, probably a season adjustment  and weather issue. A big loss in leisure and hospitality jobs in April suggests weather was a negative for the weakness in the new hires report. This is the third  time spring has shown a softness in new hires.

Private sector hires were 130,000 vs. a revised 166,000 in March

The economic news yesterday was mixed as Jobless Claims dropped 27,000 and oil prices plunged. However, the April ISM Non-Manufacturing Index dropped to 53.5 from 56, putting a damper on  buying. The ISM Non-Manufacturing Index measures activity in the services sector of the U.S. economy which addresses close to 90% of  the nation’s business.

A steep plunge in oil prices  yesterday did little to bolster prices, overshadowed  by anticipation of today’s Employment Situation Report  and elections in four of the 17 euro-area countries (Greece, France, Italy and Northern Germany), which could scramble progress made to date in employing austerity measures to solve Europe’s sovereign debt problems.

The elections plus expected weakness in the economies of European countries will combine to hammer the euro today.

Actually, the stock market has held up very well in face of negatives that at times past would have roiled prices.  To its credit, the bull market that started in early March 2009 is a bullet proof example of bull markets

Investors doubting the veracity of the old saw that bull markets climb a wall of worry,  have only look back over the last three years for proof.  Serious risks awaited it at every turn – recurring risk of a double-dip recession,  a dysfunctional U.S. Congress, European  financial meltdown, soaring fuel and food prices, Mid-East turmoil, preoccupation of the tv and print press on the negative.  The latter missed one of the most challenging recoveries in stock market history – shame!  Small wonder the individual investor is not back in.  Worse yet, he has bought bond funds where he stands to get slaughtered when interest rates turn back up.

MONDAY

Personal Income (8:30a.m.)  - Rose 0.4% in March vs a  revised increase of  0.3% in February following a 0.2% . Personal Spending rose 0.3% in March vs. a gain of 0.9% in February. Personal Consumption Expenditures (PCE) increased 0.2% vs. February’s plus 0.1%.

Chicago PMI (8:30a.m.) – declined sharply to 56.2 in April  from March’s  62.2 and February’s 64.0. Projections  ran between 58 and 62.9. The survey reflects manufacturing and non-manufacturing business in the Chicago area.

TUESDAY

ISM Manufacturing Index (10 a.m.) – That short for Institute for Supply Management Index which says little in itself, but its is a survey of a wide spectrum of business including employment, production, new orders, supplier deliveries, and inventories. Big surprise here.  The Index for April was up to 54.8 from 53.6. Economists forecast 52.9.

Construction Spending (10 a.m.) – grew less than forecast in March  with a 0.1% gain vs. a projected gain of  0.5%. Retrenchment by state and local governments was blamed for the shortfall.      February’s decline was revised to  1.4% .Construction of single-family homes paced the increase in private residential construction, multifamily construction slowed but is still up 24% YOY, outpacing an 8.4% gain in houses.

WEDNESDAY

ADP Employment Report (8:15 a.m.)– Private payroll employment  in April was 119,000 vs. a  revised  201,000 in March.  Investors will be watching this in hope of getting an early read on Friday’s critical Employment Situation Report which disappointed the Street and hammered the stock market in late March.

Factory Orders ( 10 a.m.) – declined 1.5% in March from a revised gain of  1.1% in February vs. a 1.1% decline in January.

THURSDAY

Jobless Claims (8:30) – Declined 27,000 to 365,000 bringing the 4-week moving average to 383,500.  Productivity  (output per hour) dropped in Q1 at a 0.5% annual rate after a rise in Q4 of 1.2%.  The drop may signal companies have reached a limit on how much production it can get per person, per hour.

Productivity and Costs (8:30 a.m.) – final estimate for Q4 was up to an annualized rate of 0.9%. Unit labor costs were up 2.8% vs.  a Q3 rate of3.9%.

ISM Non-Manufacturing Survey of 375 + firms hit a four-month index  low of  53.5, down from  56 in March.  New Orders dropped to 53.5 from 58.8.  The Index encompasses agriculture, mining, construction, transportation, communications, wholesale and retail trade.

FRIDAY

Employment Situation (8:30 a.m.) – new hires increased by 115,000 in April but the march number was revised to 154,000 from the 120,000 in March that caused a sharp sell off in early April. February’s report came in  at 240,000 and January’s at  275,000. The Unemployment number  dropped in April  to 8.1% from 8.2% in March.

George  Brooks

*Stock Trader’s Almanac

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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