09/09/2014 |  David Joy

Just as the employment-based case of the monetary hawks was gathering momentum, along came the August jobs report to throw sand into their gears. After six straight months of job gains above 200,000--during which the number of new jobs added each month averaged 240,000--the Labor Department reported that the economy added just 142,000 news jobs in August, well below the 230,000 that had been expected. And the net job gains for June and July were revised lower by a combined 28,000. The unemployment rate fell to 6.1 percent, but the participation fell as well.

Treasury yields at the short-end of the curve dipped slightly on the news, but stocks cheered, as the S&P 500 gained 0.5 percent on Friday and ended the week at a new closing high. The implication being, of course, that the pressure on the Fed to respond to the recent rapid decline in unemployment has been relieved, reducing the likelihood of the first rate hike coming sooner than generally expected.

Whether that proves to be true remains to be seen. One data point does not make a trend. And, the August monthly report has undergone sharp revision in the past few years. The average revision to the initial estimate over the past five years has added 96,000 jobs. But for now, the report buys the doves a little more time, and buoys the spirits of risk asset buyers who like the idea of having a supportive liquidity backdrop.

Another source of positive news for investors came from Ukraine, where a ceasefire in the ongoing conflict was announced. While the announcement offered some hope of an extended de-escalation in the conflict, reports of continued sporadic fighting suggest that lasting peace remains elusive.

Also last week the European Central Bank announced another round of stimulative policy initiatives, as the Eurozone economy continues to slow and inflationary pressures continue to drop. A reduction in interest rates and the announcement of a program to buy asset-backed securities builds on the incrementalist approach that has characterized the evolution of the bank's strategy. But it also moves it closer to an eventual program of outright quantitative easing, despite a dissenting vote from the Bundesbank President.

Taken together, these developments should be supportive of equity prices, at least for the time being. The Fed meets next week, on September 16-17, so we won't have long to wait to learn if anything has changed, at least publically, especially with QE3 scheduled to wind down next month. But the August jobs report makes any surprises less likely.

The rest of last week's economic reports were otherwise encouraging. Manufacturing, factory orders, construction spending and vehicle sales all exceeded expectations. Topping the list of this week's scheduled reports is the August retail sales report, which is expected to rebound nicely from July's flat reading. Average hourly earnings for all workers increased 2.1 percent year-over-year in August, the same as the upwardly revised July increase, and a little better than the pace of a few months ago. For production and non-supervisory employees the news was better, as hourly earnings in August rose 2.5 percent year-over year. Whether these gains are translating into a more optimistic consumer will also be reflected in the preliminary reading of the University of Michigan's Consumer Confidence index, scheduled for release on Friday.

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Disappointing Jobs Data Gives Stocks Reason to Cheer
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