What happens when an irresistible force meets an immovable object? I am not sure but I think we may be facing this paradox as it relates to the markets and this week’s employment situation report. Most economic reports over the last month have indicated a soft economy and we hear more and more talk of a double dip recession. While a double dip recession is not likely, the consensus seems to be that we will run out of stimulus spending before the recovery begins in earnest. Yet equity markets have skyrocketed in July. The Dow is up more than 1,000 points since it hit a nine-month low following the release of the June employment report on July 2.

 Today (Aug. 4) the Dow set a near three-month high after the monthly ADP jobs survey indicated private sector jobs rose 42,000 in July. Most analysts viewed this as positive yet it may not be. The consensus of various reporting groups on the July employment report is for unemployment to rise to 9.6% from 9.5% and for non-farm payrolls to drop by 50,000-100,000 jobs. The negative number is based on a further reduction of temporary census jobs. The Wall Street Journal Market Data Center expects private sector jobs to increase by 100,000.  By my math that makes the ADP number, which only measures private sector payrolls, bearish not bullish.  

Add to that the Dow gained 1,000 points since the last employment report and we can be in for a rough Friday. From what I can see there are two scenarios: One the market knew something the rest of didn’t and the report will be better than expected. In that case people buying the last month will take profits in typical buy the rumor sell the fact fashion. The other is the report will be worse than expected and the market goes south.

Either way it calls for a sell-off, and a big one.

Of course the third scenario is that the market is responding to weak economic news and as has been suggested, the Fed is going to have to return to quantitative easing instead of beginning its exit strategy. We could be back to the bad news is good and good news is bad fundamental based on potential Fed activity. 

This is scary because we have not dug out of the hole the current stimulus in all of its forms has created. The question is have we taken the bad medicine yet or are we still delaying the inevitable?

I am not sure but I would be careful on Friday.

Tags: Economic outlook, Federal Reserve, Unemployment report

This entry was posted on Wednesday, August 4th, 2010 at 7:27 pm and is filed under economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.