Jobs Report and Europe

The Jobs report for July came in a little bit better than than expected. The economy created a total of 117K jobs with 154K private sector jobs. The public sector lost 37K jobs.

There was some initial Euphoria from the better than expected jobs report, but I did expect the sell off to resume as this sell off is more due to European issues rather than the US economy. We did start selling off into the abyss and at one point the s&p was again down almost 3%. We got a solid bounce after some reports surfaced that the European Central Bank has agreed to buy Spanish and Italian bonds if those respective countries agreed to certain austerity conditions.

I think there is chance of a bounce early next week due to the oversold nature of the market, but after that it is hard to say whether the bounce will stick or we will head back down to new lows. It will depend a lot on the European government response and if the US Fed decides to add further stimulus. I don’t expect QE3 at this time, but I do think a minor step like paying no interest on bank reserves might be announced. Currently the Fed pays 0.25% interest on all the extra deposits banks have at the Fed (the money banks are allowed to lend but they cannot or don’t want to). Not paying interest on that might give banks an incentive to lend it out. I don’t think it will have any real impact, it might just give a psychological boost to the market that the fed is willing to act.

I do fear that the August jobs number is going to be bad. The jobs number data is collected in the middle of the month. So the July jobs data probably did not capture the worst effects of the debt limit talks. The worst effects of the debt limit uncertainty and the current market crash will be captured in the August jobs report. I hope this turmoil in the financial markets ends soon as the longer it stays it will hurt the real economy.

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