06 September 2010 at 8:04 GMT
Following a hectic week, reporting agencies must have thought that we all needed a break. At least the calendar is quite light this week with the Bank of England meeting being one of a few potential market movers. Tomorrow will see the RBA and the BOJ announce their target rates and Germany will release its latest report on factory orders.
The US employment report was another victory for the bulls and despite the quite poor ISM nonmanufacturing index one-and-a-half hours later risk held on to the finish line. Three days of better-than-expected numbers was all it took for sentiment to turn around as the recovery is now apparently still on. We maintain that equities are too optimistic, but the 1100 level we mentioned last week is now the next hurdle to be cleared.
The positive points of the employment report include private payrolls, hourly earnings and the unemployment rate (to some extent). A total of 67,000 new private sector jobs were created in August (on net); much higher than our estimate of 5,000. The downside – assuming that the number will not be revised down – is that almost all of the new jobs were in the education and healthcare industry (45,000) instead of the goods-producing sector (0).
A total of 114,000 temporary Census workers were let go in August, close to our call for 115,000. Another 7,000 non-Census government workers were also let go, meaning that NFP declined 54,000.
The unemployment rate rose slightly to 9.6%, but once again the participation rate disturbed the picture. Indeed, 550,000 people entered the labour market in August and of those 290,000 found employment. As we have stressed several times, if an increase in the unemployment rate is due to a higher participation rate, it is not necessarily negative as it means more people came back to the labour market. However, for August, things were less bright as most job-finders were part timers. This also explains why the broader U-6 under-employment rate rose to 16.7% from 16.5%.
ISM non-manufacturing, which covers roughly the 90% of the economy outside of manufacturing, disappointed quite handsomely though the market never seems to give this report the credit it is due (the US economy is not based on manufacturing anymore). The index dropped all the way to 51.5 in August from 54 in July and most of the components were horrible. The employment component was particularly weak at 48.1, which puts it right back into contractionary territory (threshold is 50). This certainly does not corroborate very well with the solid private payrolls print and neither does jobless claims.
Read the Morning Kickoff.
Look at the Charts of the Day.