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Daily Market Report for 1 August 2014: Market Focuses On Labor Report Tonight

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July’s employment report is expected to show a continued strong pace of job growth

The 2Q rebound in economic activity should set the stage for a strong month of hiring. While concerns about the composition of job growth and wages persist, the July report should be the seventh consecutive strong report in a row.

July’s employment report is expected to show a continued strong pace of jobs growth and the unemployment rate to stay low. We are more concerned of whether good news for the economy will be bad news for stock markets with DJIA (Dow Jones Industrial Average) selling off more than 300 points overnight. Stocks fell sharply on Thursday in part of the idea that an improving economy and pickup in inflation could push the Fed to raise interest rates more rapidly than expected. Still in the end no matter what, the rate hike is in 2Q or 3Q next year. We stick to our view that yield will rise and dollar will rise in a very gradual pace with great patience. Who cares what the Feds are trying to say? They can give a million of excuses on the accommodative policy extension but in the end, they have to surrender to the real picture – economic condition.

NPF tonight could decline slightly from the 288,000 jobs added in June to 240,000 in July and an unemployment rate of 6.1% unchanged. Hiring is expected to remain broad-based in July, with gains in services, construction, manufacturing and professional services. Bond yields initially jumping and stocks dropping are the concern as it could speed up the Fed’s rate hiking program overnight. Stocks were also reacting to concerns about the European economy and banking system, and the potential ripples from Argentina’s default.

Market will then focus on the job reports, and if it is very strong it can cause a jump in rates that would shake pricing of the stocks. What could be the fear now is that the Fed would be behind the curve as the central bank has been looking for wage growth, a sign that the economy is moving toward a higher level of employment, but it also can be the early kindling for inflation. Is it too conservative for the Fed or are they right? No clear conclusion is available now, but facing the reality – we are much closer to the end of ZIRP compared to a few months back. Consistently good job growth will help eliminate labour slack, something that Fed Chair Janet Yellen had been concerned about. The Fed, in its post meeting statement on Wednesday, said it sees improvement in the job market but troubling factors remain, which would include a low participation level and long-term unemployment.

China’s manufacturing expanded in July at the fastest pace since middle of 2012, signalling that a pickup in economic growth is strengthening due to government support policies. The Purchasing Managers’ Index was at 51.7, A separate PMI from HSBC Holdings Plc and Markit Economics rose to an 18-month high of 51.7. Readings above 50 indicate expansion.

The data indicates that the world’s two largest economies are gaining momentum, after the U.S. this week reported a 4% pace of expansion in the second quarter. Confidence in China’s outlook drove the nation’s benchmark stock index to a seven month high this week, even as a property market slump deepens and credit risks rises.

Targeted easing measures have taken effect and external demand has been improving, which has helped to drive the manufacturing activities up, together with the external recovery.

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