For those of us for whom market watching is a full time occupation, the first week of the month is usually quite boring. It is “jobs week” and all eyes are usually on the Bureau of Labor Statistics’ report that comes out on the Friday of the first full week each month, leaving the week that precedes that as a bit of a non-event. That has been especially so over the last year or so, as the “will they, won’t they” guessing game about the Fed’s intentions has become an obsession for pundits, traders, and investors. To some extent everything is now seen through the prism of its effects on the Fed, but for a couple of years now the jobs report has been the thing that was reckoned to most directly influence their decision. This week may be different though, and there are a couple of pre-season earnings releases that probably better deserve our attention.
Recently, as it has become clear that the FOMC (Federal Open Market Committee: The Fed committee that sets interest rates) is about evenly divided as to whether or not to raise rates, there has been more of a focus on the thoughts of the individual members than the data that prompt those thoughts. In that respect, the run up to Friday’s jobs report could be quite a bit more interesting than usual as there are five separate speeches from four different FOMC members slated for Monday through Thursday of this week. In addition, any reaction to the numbers on Friday morning will probably be quite muted, as there are four speeches by Fed people later that day.
There is a good chance, then, that by the time we actually get to the data we will all be thoroughly confused. It is increasingly evident that the economic theory that says that improvement in the labor market results in upward pressure on prices doesn’t apply at the moment. There are several theories as to why that is so, and which you believe is largely tied to your political outlook, but if prices are stable despite good jobs numbers it removes the imperative to raise rates. Hikes are designed to damp down an overheating economy and avoid inflation. When there is no sign of inflation, therefore, why hike?
Next week corporate results will be where the focus is, as Alcoa (AA) report third quarter earnings after the close next Monday and we enter another earnings season. It could easily be argued that whatever the FOMC members say this week, and whatever the jobs report tells us, it is corporate profits for the last quarter that will really set the tone for stocks over the next few weeks. According to many analysts we face the prospect of a sixth consecutive quarter of lower earnings on a year on year basis. With valuations where they are that should be more worrying to investors than the timing of any Fed action.
We will get a few clues this week as to what to expect when some companies whose fiscal quarters don’t conform to the norm report. Tomorrow, for example, Darden Restaurants (DRI) and chip maker Micron Technology (MU) will both report earnings. Both have company and industry specific issues that will influence their results, but commentary and guidance from management in each case will give interesting insights into the state of both the consumer and manufacturing economies in the U.S.
Then on Wednesday we get a more international view, as Global Payments (GPN) and Yum! Brands (YUM), the owner of Taco Bell and KFC, release their results for the quarter ending in August. YUM in particular, with their strong presence in the important Chinese and Indian consumer markets, can give us vital clues. For all that the recovery is continuing in the U.S., without global growth driven by the emerging markets it will continue to be an uphill struggle.
It is growth in overall economic activity, not just an improvement in the headline jobs number that will create conditions that allow for a rate hike that doesn’t adversely affect the economy. The performance of and the outlook for the four companies above will give us a better snapshot of the prospects for that growth than will the jobs report, so traders and investors should be paying attention to that, not just hanging onto every word from Fed Board members or waiting for Friday morning.