Bad News Isn’t Giving the Stock Market a Good Boost
Things are looking, well, kind of bad Thursday. A quick stroll through some of the morning’s top headlines paints a pretty glum picture. Bad news here and abroad, more signs of a stagnating economy. It’s the kind of thing that would make a central banker think twice about making interest rates go higher. So where’s the rally?
U.S. stocks have narrowed their losses, but still are in the red, bucking the “new money” meme, and bucking the “bad news is good news” meme. Traders seemed genuinely surprised at some of the news. After all, just about every Fed speaker has been touting an improving economy as justification for raising interest rates. That turnaround is not apparent in Thursday’s news, as even a cursory glace at the headlines shows:
– Wal-Mart to Cut 7,000 Back-Office Store Jobs
– ISM Manufacturing Index Showed Contraction in August
– IMF Signals Another Downgrade to Growth
– U.S. Productivity Drop in Second Quarter Revised to 0.6% Rate
– Auto Sales Tapping the Brakes
Those are not the signs of a booming economy.
The ISM report was especially surprising. Street consensus was that the index would land at 52 – not a gang-buster number, but at least above the 50 level that delineates expansion from contraction. Instead, it slipped under 50 for the first time since February. It may not exactly point to an economy-wide contraction – Capital Economics reckoned that the ISM at this level equals about a 1% GDP rate. That shouldn’t come as much of a shock, seeing as that’s been about the growth rate for nine months now. The problem is, we’re been conditioned to expect some kind of turnaround in the second half.
The productivity report was also a surprise. Productivity for the second quarter fell at a 0.6% rate, revised down from the first estimate of 0.5%. More ominously for investors, unit labor costs were revised up to a 4.3% rate, from 2%. Inflation-adjusted hourly wages were revised to a 1.1% rate, from an initial estimate of negative 1.1%. The drop in productivity, along with rising labor costs, will eventually push companies to pass along the higher costs, said Joan McCullough at Longford Associates, at a time of weak economic growth.
“This is a real dilemma of stagflation,” she said.
The ISM said not to make too much of the August figure, that the economy was likely to return to growth. We’d be inclined to agree, if not for all the other stories out there that also point to a weak economy. Another story developing this week is the bankruptcy of South Korean shipper Hanjin, which filed for protection from creditors amid global overcapacity and slumping trade. The presents are still likely to be under the tree come this Christmas when little Tommy and Tina come running down the stairs, but right now they are sitting in containers moored off the California coast, and nobody knows when they’ll get unloaded.
The ISM figure, moreover, will effectively change the math for tomorrow’s jobs report, RBS economist Michelle Girard said. “All else equal, this raises the bar in terms of how strong the payroll gain in August (reported tomorrow) needs to be to push the Fed to act in September. Without signs of further progress on inflation and with these data raising some warning flags over a loss of momentum (at least in manufacturing) post-Brexit, we continue to believe this cautious, risk-adverse Fed is more likely to wait for more information rather than hike in September.”
“After today’s ISM Manufacturing Index showed a surprise contraction in August, we feel this is just the thing the Fed needs to continue to explain the hold they will decide on in September,” Brett Ewing, the chief market strategist at First Franklin Financial Services, wrote in a note.
If the action in the market over the past two hours or so is any indication, that message might be filtering through the market.