Siegel - Inveterate Green Shooter

For once the ADP estimate was right. Payrolls lost 467k, exactly 100k more than the Bloomberg consensus and almost exactly on the ADP 473k number that came out yesterday. Fortunately, the details of the report are better than the headlines. Government jobs were down 52k, so private payrolls were down only 415k. Manufacturing jobs were down 136k, slightly less than the 150k consensus, and the unemployment rate only crept up to 9.5%, instead of 9.6% as expected. Furthermore, hourly earnings were unchanged on the month and up only 2.7% year over year. Jobless claims were almost exactly on expectations of 615k while continuing claims fell 53k.

All this news is not at all a “disaster,” and there are some very good takeaways. First, and most important, is that the inflation scare of the last couple of months, concentrated in the rise in commodity and energy prices, has definitely ebbed. Oil is now at about $63, gold down to $927, and the CRB Index is down 6% from its mid-June high. The very slow rise in hourly earnings, the year-over-year data are down one full percentage point from the January figures, is confirmed by the record low ECI (Employment Cost Index) readings.

This means that there is absolutely no inflation coming from the labor front and there would be no reason why the Fed cannot keep its “indefinite” hold on its ZIRP (Zero Interest Rate Policy). Stagflation, a particularly toxic combination of slow or no growth and inflation, now seems more unlikely. Furthermore, low inflation will keep the long bond in check. All of this sets the stage for better stock prices once the recovery comes more clearly in view.

...Hopefully, the slowdown in the rise in the unemployment rate (today’s report was the first time in many months that the rate came in less than expected) might cause consumer confidence, which saw a disappointing drop in June, to rebound. Most importantly, there’s nothing in the data – or in the market’s initial reaction – that presages another severe drop in equities. At worst, stocks will remain range-bound, awaiting new economic numbers.

---Jeremy Siegel, Weekly Commentary, 7.2