World Week Ahead: US needs jobs growth after GDP data

Monday 1st February 2010

Hot on the heels of Friday’s report showing the US economy is powering ahead will be the latest read on whether all that activity is translating into jobs growth.

On Friday the US Labor Department will release its January non-farm payrolls report, amid expectations of a gain of 5000, according to survey by Reuters, to 13,000, according to a Bloomberg News survey. Investors should get a better idea when the ADP report on private employment is released on Thursday.

Before then, equities will continue to be driven by earnings. About 500 US companies have reported so far with almost three quarters of them exceeding expectations. This week it’s time for Exxon Mobil and United Parcel Service among others.

While earnings have been ahead of forecasts, investors have been hesitant stock buyers amid concerns about what lies ahead.

Data from Bespoke Investment Group shows the average stock of a company whose earnings beat estimates gained only 0.8%, compared with a 2.9% drop in those that missed.

Investors are wary of the future, as reflected in concerns about the strength of the US economy. Most economists expect the economy to slow from its fourth-quarter surge, which was the fastest pace it has recorded in more than six years.

New York University Professor Nouriel Roubini, tagged as "Dr Doom", told Bloomberg that the latest growth numbers were “dismal and poor”.

Roubini said more than half of the expansion was related to a replenishing of inventories and that consumption depended on monetary and fiscal stimulus. As these forces ebb, growth would slow to just 1.5% in the second half of 2010, he said.

That would be a rude awakening for corporate profits and stock valuations.

For January, the Dow average fell 3.5%, the S&P 500 shed 3.7% and the Nasdaq Composite dropped 5.4%. In Europe, the Dow Jones Stoxx 600 shed 2.7%.

There will be an early indication of the sustainability of growth when the Institute for Supply Management releases its manufacturing report for January. Economists in a Reuters poll are expecting a reading of 55.2, showing an expanding sector for the sixth straight month.

That will be followed by the ISM's service sector survey on Wednesday, expected to edge into growth mode after the largest segment of the U.S. economy struggled to find its footing in the fourth quarter of last year.

As stocks have faltered in the last two weeks, the US dollar has recouped some its 2009 losses. The greenback may extend those gains early this week, mostly because of lingering concerns about Greece and the fiscal stability of the euro zone.

The euro fell 1.9% against the US dollar last week, while the dollar gained 0.2% versus the yen.

On the weekend, the Greek government denied a published report that its three-year plan to put its fiscal house in order would be rejected by its European partners.

The European Commission is to assess Greece’s budget plan on February 3, according to a statement on its web site.

January also proved to be a tough month for commodities, in part as China moved to rein in lending to keep inflation in check.

Copper recorded its biggest monthly drop since 2008, reflecting high inventories in China as well as increasing bets that US interest rates will rise sooner than later.

On Friday, copper futures for March delivery fell 4.55 cents, or 1.5%, to US$3.0525 a pound on the Comex division of the New York Mercantile Exchange.

Gold lost its lustre for a second month in a row in January, also hit by the rebounding US dollar. On Friday, gold futures for April slid 0.1% to US$1083.80 in New York. During 2009, gold appreciated 24%.

On the speaking front this week, the focus is on Washington.

US Treasury Secretary Timothy Geithner will speak before a Senate committee about the Obama admistration’s fiscal 2011 budget on Tuesday, while Paul Volker, a key adviser to the President, will give testimony to the Senate banking committee on rules to limit high-risk bank activities.

President Obama said reducing the federal budget deficit was “critical” to ensuring future growth as the US economy recovered from the recession. The government’s debt had “been accumulating for far too long,” Obama said today in his weekly radio and Internet address.

The Congressional Budget Office is forecasting 2010’s deficit would be US$1.35 trillion, slightly lower than last year’s US$1.4 trillion.

Businesswire.co.nz

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