Jobs Report Should Be In Line – Muted Reaction. Earnings Will Be Back In Focus Next Week.

May 3, 2012

The market is consolidating gains from last week and it is within striking distance of new multi-year highs. Asset Managers are not going to aggressively buy stocks ahead of major economic releases and they are in a holding pattern. After tomorrow, they will be ready to reach for their wallets.

Tuesday, ISM manufacturing exceeded estimates and construction spending came in better than expected. The “sell in May and go away” crowd got squeezed and that fueled the rally.

ADP employment has been a good barometer for the Unemployment Report. However, it contradicted the Unemployment Report last month. It showed that 210,000 jobs were created in the private sector and the Unemployment Report came in 100,000 shy of that number. That disparity is correcting itself. ADP came in light yesterday and the Unemployment Report for March will probably be adjusted upward.

Yesterday, ADP reported 119,000 new jobs in the private sector during April. The market pulled back on the number and recovered throughout the day. This morning, initial jobless claims dropped by 27,000 (365,000). It has remained elevated since Easter and this decline will calm nerves ahead of Friday’s jobs report.

Analysts are expecting 175,000 new jobs and that seems a little high. Traders seem willing to give that number a “free pass” for now. As long as we come in north of 120,000, the market should be able to tread water. Warm weather made job growth look stronger than it was a couple of months ago and now that distortion is being “worked off”. Even if the Unemployment Report comes in light, the “Bernanke put” will keep a bid to the market. Many traders are still hoping for QE3.

Last week, the Fed said it is not currently considering additional easing. A month ago, this news would have resulted in a market decline. That didn’t happen last week and it is a sign of strength.

On a global basis, central banks are easing and this is bullish for equities. Two weeks ago India lowered rates by 50 basis points for the first time in four years. Australia lowered interest rates by the same amount two days ago (25 basis points was expected). Inflation in China has dropped below 4% and the PBOC has hinted that bank reserve requirements will be lowered. This morning, the ECB will release its statement and many analysts believe that they will lower rates in June.

Economic conditions in Europe are slipping. The PMI was dismal and growth in Germany is a concern. However, the IMF has more than $1 trillion in its coffers and credit concerns are temporarily contained. Out of all of my inputs, this is the most important variable and is the most unpredictable. Credit concerns can flare up at any moment and I monitor yields constantly. Spain successfully auctioned €2.5 billion in bonds last night.

Last night, China’s non-manufacturing PMI fell to 56.1 from 58. That was not a particularly good number. Strength in China needs to offset weakness in Europe. Tonight they China will post its manufacturing PMI.

Earnings have been strong. We are well past the halfway point and profits are up 10% year-over-year. The guidance has also been positive.

I believe that tomorrow’s Unemployment Report will be a yawner. We should see 150,000 new jobs in April. That is an improvement over last month, but it is below consensus estimates. The market will hold recent gains and it will focus on earnings next week.

ISM services will be released 30 minutes after the open. They should come in a little soft, but it won’t generate much of a reaction. Traders will wait for tomorrow’s number and the market should trade in a fairly tight range today.

Provided that tomorrow’s number is not disastrous (less than 100,000), I believe we will have an opportunity to sell out of the money put credit spreads. The market wants to move higher, but it is bumping up against major resistance. The gains will be hard fought and I still want to keep my distance.

If we get a nice swift pullback, I will wait for support and I will get long. As long as European credit concerns are tame, stocks will try to move higher. Weakness in Europe will be offset by strength in Asia. Solid earnings, low inflation and global central bank easing will keep a bid to the market.
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