Stocks hit by weak US jobs report, but there's a silver lining

U.S. stocks will open lower Friday as a lower-than-expected Non-Farm Payrolls read in August hit investors, sending them in fear into safe assets such as bonds and gold. But digging deeper into the report reveals some bright spots.

S&P 500 Index futures are currently down 1.6 percent. The NFP number for August at 0K vs the 68 consensus is weighing on stocks and is one for the vers in more quantitative easing - depite recent better-than-expected U.S. factory orders. 

Job data are not pointing towards recession
The flat reading for the August change in NFPs may have caught some bulls off guard, but when we dig deeper the report it was actually better than the headline flat reading suggests.

The ADP Employment Change of 91K may have given hopes of a better number, but methodological differences explain much of variation since the Verizon (-45K) strike does not feature in the ADP data but does in the Bureau of Labor Statistics. Adding the strike back, we land at +45K, not bad for a month mired by strikes, debt discussions and recessions fears. Though in no way does this mean that this is a good number by any means.

The unemployment rate held at 9.1% despite a gain in labour participation to 64% from 63.9%. This was due to a large influx of employees in the Household Surveys – on which the Unemployment Rate is based – of +331K. However, other measures of labour market health such as weekly hours and average hourly earnings deteriorated and thus this report cannot be labelled as anything but weak.

Overall, we deem this report to be positive given the news surrounding the report, but weak on an absolute basis. It is certainly not impressive by any standards, but also not the thing of recessions. The Verizon strike should add back in the September report (note how Household Employment grew despite the strike since it does not count such) and we remain faithful to our “not-recession, but bumbling-along scenario”.

With dividend yields at 2.8 percent on global stocks compared to 2.2 percent in US 10 year treasuries and inflation running at 3.6 percent annualised in the U.S., we still think stocks are attractive. In fact we are seeing the highest spread between dividend yields and earnings yield on global stocks to US bond yields since 1997 (only the first two months of 2009 were more attractive) and as we still see a low probability for the U.S. economy entering a recession this provide an attractive entry point.

Spanish and Italian yields surge again, AstraZeneca study triggers fall in share price
In Europe, the Euro STOXX 50 Index futures are down 3.3 percent as Non-Farm Payrolls added to the negative sentiment and renewed uncertainty over the region’s sovereign credit market with yields on Spanish and Italian 10 year bonds increasing for the second straight trading day. Earlier, U.K. PMI in the construction sector in August declined to 52.6 worse than estimates of 53.2 signalling further deterioration in the country’s fragile construction sector.

AstraZeneca is down 3.7 percent in London trading as new study shows that the company’s drug Crestor is not significantly better than its rival Pfizer’s Lipitor.