Stocks are playing the waiting game, as the Employment Situation Report approaches. Stocks hardly moved yesterday (SPDR S&P 500 (NYSE: SPY) down 0.2%) or for the week for that matter, as a combination of trading volume summer lull (save for around earnings reports) and an impending important data point kept broad bets off the table. However, that could all change after this morning's data is published, though depending on the data.
The Employment Situation Report will be published this morning for the month of July. Economists expect the unemployment rate will improve to 4.3%, from 4.4% in June. Whether it does or not, the labor market is clearly operating at full employment and lacking that slack the Fed has been talking about (correctly) for the last few years.
Full employment is a positive for the economy. The longer Americans are employed, the more likely they are to buy a home or car; to make improvements to their homes; to go on vacation; to eat out; to spend money. Our economy is two-thirds consumer spending driven, so full employment matters, especially the longer it holds.
Every report I have read lately has indicated there are labor shortages across industries. In my coverage of the latest service sector readings this morning, we found labor shortages were reported in construction (for years now too), in services and temporary staff. Labor shortages mean a lot for today's data.
Nonfarm payrolls may in fact approximate economists' expectations for an addition of 178K jobs in July. It would be a smaller expansion than the 222K produced in June, but at full employment, it represents impressive job creation. It means all those folks who gave up on jobs and who are changing careers are being pulled back into the labor market. More importantly, it means hope is alive again in America.
Growth in the job market is still being driven by the private sector, and that is a healthy thing. ADP estimates private nonfarm payrolls increased 178K last month, and economists pretty much agree, with a forecast for 175K new private sector jobs added in July.
Labor shortages mean compensation inflation is on the way, and considering the Fed's watchful eye for inflation, this data will be combed over carefully. Economists expect average hourly earnings increased 0.3% in July, versus a 0.2% increase in June. That would make the annual pace of earnings increase 2.5%, matching the pace for June.
Expect a pickup in wage inflation soon, and for labor inflation to begin to drive prices generally, along with the recently soft dollar. However, I expect dollar stabilization-to-appreciation from here, thanks to economic robustness and Fed policy. The average workweek matters too this month. Economists see it holding at 34.5 hours.
Indications of inflation without data showing economic growth picking up might be a concern for stocks. However, if investors begin to see what I am seeing in the economy, a pickup in economic growth, then some inflation and even Fed action is healthy. It's a delicate balance though...
Investors Friday should be enthused by an inline or better nonfarm payroll increase, and probably not too bothered by a slight miss. If the figure comes in well-below estimates, however, that would trouble investors a bit about the economy. Significant indication of inflation would not be welcomed, as economic data has thus far not made enough of a case for a pickup in second half economic growth. The market, in that case, would worry about the Fed and stocks would give way.
So, in conclusion, we play the waiting game, both for the economy and for this morning's data. As it is summer, inline data simply means traders head for the beach early and stocks meander as they have all week. Though, with the Baker Hughes Rig Count data not due until 1:00 PM, we have a regular monkey wrench in our beach plans these days. For more of my regular work on the markets, readers are welcome to follow the column here at Seeking Alpha.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.