Wall Street's hopes for a rapid recovery from recession, muddled by disappointing US labour market data, faces a new test in the coming week with the looming corporate earnings season.
The market was hammered by news of steeper-than-expected US job losses in the past month, which dampened hopes of a quick recovery, putting the earnings season in the spotlight for investors. In the holiday-shortened week to Thursday, the Dow Jones Industrial Average slumped 1.87 percent to 8,280.74, a third consecutive loss for blue chips.
The broad-market Standard & Poor's 500 index slumped for a third week, losing 2.45 percent to 896.42, while the technology-heavy Nasdaq lost 2.27 percent over the four-day week to 1,796.52. The market had been on a positive track for the week until Thursday's shock data showed a disappointing 467,000 jobs lost in June - far worse than expected and a reversal of the improving trend from May.
The report dashed hopes that had been growing for an early recover to the recession that has gripped the world's biggest economy since December 2007.
"For all the talk of an impending US economic recovery, June's worse than expected non-farm payroll report highlights that the current recession lives on," said Meny Grauman, an economist at CIBC World Markets. "The outlook for the US economy remains decidedly negative despite a slew of better than expected economic data. Not only are monthly payroll declines still in the triple digits, but earnings are growing very slowly, and hours worked are being cut back."
Grauman said the weakness in the job market will hurt incomes, leading to sluggish spending and overall economic activity.
Others say a single report should not detract from what appears to be a stabilisation in the economy, highlighted by improving trends in manufacturing and spending.
"We need to take stock for a minute and ask whether this was a reversal in the downward trend in payroll losses or just a hiccup in the process of stabilising the job market," said Joel Naroff at Naroff Economic Advisors. "I have always argued that one month a trend does not make and that is the case with this data. But the employment reductions have to slow soon if the economy is to start to rebound."
Philip Orlando at Federated Investors said the data "clearly was a step in the wrong direction for the recovery of both the economy in general and the employment market in particular. "We continue to believe that January 2009 remains the trough of the current jobs cycle," with a loss of 741,000 jobs.
"We are also sticking to our controversial, out-of-consensus belief that the economy likely bottomed during the just-completed second quarter, and we are still forecasting a resumption of positive gross domestic product (GDP) growth in the second half of calendar 2009. But today's jobs report was undoubtedly a black eye for our forecast."
David Rosenberg, chief economist and strategist at Gluskin Sheff, said the market is now searching for direction after a powerful rally from lows in early March, and that investors will look to the upcoming corporate earnings season.
"Our challenge now is navigating the forecast after a massive 40 percent-plus rally that has already occurred without any evidence of a meaningful earnings turnaround," Rosenberg said. "The onus was on the bears back in March; the onus is now with the bulls ... In other words, there is a whole lot of good news priced into stocks at current price levels. From our vantage point, a pullback towards 800 on the S&P 500 would not only be justified under the prospective earnings landscape, but from our perspective would likely provide a welcome buying opportunity."
Bonds ended the week mixed. The yield on the 10-year Treasury note fell to 3.495 percent from 3.506 percent a week earlier and that on the 30-year bond edged up to 4.317 percent from 4.303 percent. Bond yields and prices move in opposite directions. The coming week sees the first of the blue chips, Alcoa, reporting earnings on Tuesday, and a survey on the US services sector from the Institute of Supply Management.
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