Investors face a back-end-loaded week, with not much to mull over until Friday’s release of Canadian employment figures and the U.S. non-farm payrolls for July, a number that will be the first major statistic to raise the curtain on how the United States economy fared last month.
After payrolls fell in June for the first time this year, worries abound that another poor showing on the jobs front will be further confirmation that the U.S. economy is losing momentum. The consensus is for a loss of 60,000 positions, following the 125,000 drop the previous month.
“If we’re going to get a negative July … it will reinforce the label of a jobless recovery,” predicts Ashraf Laidi, chief market strategist for CMC Markets, the London-based online derivatives trading firm.
While the jobs number always makes a big splash among traders, some market watchers contend all the attention focused on it is misplaced because the initial figure to be released is subject to so many revisions it seldom gives a totally accurate picture of the labour market.
“Why we continue to pay as much attention to non-farm payrolls as we do is amusing to me and disconcerting at the same time,” says Dennis Gartman, publisher of the Gartman Letter.
If the payroll data are weak, they should help support the huge rally in bond prices that has been underway since early April. Bonds have been on a tear – the price of two-year U.S. Treasury notes hit a fresh record high on Friday – based on hopes that the economy is so weak that inflation is tipping into deflation, the dangerous condition of falling consumer price levels.
On the surface, the simultaneous upward movement in both bonds and stock markets is a conundrum.
If bonds are rallying because growth is weak and deflation is near, this would normally be seen as disastrous for stocks, which do best when the economy fires on all cylinders. Yet July marked the best month of the year for U.S. stocks.
Mr. Gartman doesn’t think the two markets are sending contradictory messages. He believes the combination of benign inflation and moderate growth may explain why both stocks and bonds can be in rally mode together.
“Maybe it’s telling us that we’re going to a period of 1950s-like, rather quiet, low inflation, quiet, low economic growth,” he says.
But Mr. Gartman says this environment isn’t going to lead to super-sized stock returns. Equities tend, over long periods, to have average returns between 6 per cent and 10 per cent a year, including dividends.
He thinks we’re going to be at the low end of the range, with perhaps 3 per cent a year from dividends and 4 per cent from capital gains, for an indefinite period.
“Do I think you’re going to have some rollicking, joyous bull market, such as we had in the latter half of the 1990s? Not in my lifetime,” he said.
Mr. Laidi from CMC Markets says he foresees a consolidating stock market near-term, but has a longer-term outlook for weakness that should be evident in the fourth quarter.
He says toward the year-end the market will have lots to worry about, such as uncertainty around the results of the U.S. mid-term elections and possibly more evidence of a slowdown in the Chinese economy.
