A Stronger Than Expected July Labor Report

By: Kent Engelke | Capitol Securities

In my view, July’s labor report was generally stronger than expected. Year over year wage gains were higher than expected, the labor participation rate rose by 0.1% and previous months were revised higher. A major catalyst for the greater than expected job gains was in the manufacturing sector, perhaps the sector that is the greatest beneficiary of the drop in the value of the dollar.

Commenting further about the LPR, it appears more people entered the work force and found jobs. This in my view is perhaps the most significant aspect of July’s report. The diffusion index or the indicator designed to measure the broadness of job creation is at the highest level since February.

In my view, the data is consistent with economy growing between 2.5% and 3.0%, not 1.50% to 2.0%. As noted many times, GDP at 3.0% changes every accepted assumption.

Friday, former FRB Chairman Greenspan again warned on CNBC about an inflationary environment that could develop ending the 30-year bull market in Treasuries stating further that any increase in rates could occur quickly with an outsized impact upon certain sectors of the equity markets. Greenspan gave no timing for such a transition rather stating “it looks stronger just before it is not stronger.”

Treasuries were lower on the unemployment data but the selloff accelerated following Greenspan’s comments. Equities were generally flat, but oil advanced about 1% on the belief that demand will continue to rise because of greater economic activity and falling supplies/inventories. Some are attributing Friday’s advance in oil to an upcoming OPEC meeting. Will this be of any substance?

Even though there was little comment about Venezuela, is the oil market also concerned about greater violence in this beleaguered nation that may lead to supply disruptions and supply disruptions, the result either from sanctions or civil unrest?

This week’s economic calendar is relatively light and is primarily comprised of inflationary data.

Last night the foreign markets were up. London was up 0.17%, Paris was up 0.01% and Frankfurt was down 0.37%. China was up 0.42%, Japan was up 0.52% and Hang Sang was up 0.46%.

The Dow should open flat. The 10-year is off 4/32 to yield 2.28%.