Optimism that the economy is recovering in the third quarter has allowed the benchmark S&P 500 to rebound by 52% since early March, but in the past week markets were unimpressed with fresh data, even though most of it was positive. Analysts said investors were not sure the rapid 5-month gain in markets was justified, leading many to take profits while they could, pushing their cash from risky equities into bonds. A rally in Treasuries caused the 10-year yield to fall from 3.60% last Monday to 3.45% this morning.

Looking to this week’s data, the trends are looking positive for equities. “Following a pattern that has provided good buoyancy to corporate profits and the stock market for a number of weeks, the economic reports next week are expected to cross the plate with a generally positive spin,” said analysts from IHS Global Insight.

Major releases this week includes the ISM manufacturing survey, a key index based on the opinion of manufacturing executives across the country, which is expected to cross the threshold into growth mode after 19 months of contraction. Its cousin index, the ISM services index, is expected to show that deterioration in the services, financial, and construction industries is slowing though not quite stabilizing. On Friday, the Employment Situation survey is expected to report that 200k payrolls were cut in August ― a relatively benign figure compared to the first quarter ― but one that would push the unemployment rate up two-tenths to 9.6%.

Those in Real Estate will also want to check out the dual housing reports on Tuesday: Construction Spending should be flat in July following a unexpected bounce in June, and Pending Home Sales are expected to tick up 2.3%, allowing the annual gain to hit double digits at +11.1%.

With little data from the US coming out today, equity futures are trading off news from overseas markets, and the results are far from good. China’s Shanghai index, which has been especially volatile in recent weeks, plummeted 6.74% in the month’s final session, the biggest drop in 10 months. 

Two hours before the open, futures for the S&P 500 are down 6 points, while those for the Dow are 70 points lower.

The only data release from the US with the potential to change sentiment today is a regional index from the Midwest at 9:45. The ISM Chicago Business Barometer is expected to jump five points to 48.0, following in the steps of optimistic reports from New York, Philadelphia, and Richmond. The Chicago index is a primary forecasting tool of the ISM index to be released Tuesday (details below).

Key Releases This Week:

Tuesday:

10:00 ― Broad advances caused the ISM manufacturing index to spurt ahead 4.1 points in July, leading many to believe the downturn in manufacturing had come to a close. A month later, that sentiment continues to hold, as surveys from New York, Philadelphia, and Richmond all beat expectations and climbed into positive territory in August. The median forecast for August’s ISM survey is 50.5, the first growth marker since January 2008.

“With strength in the East and a major rebound in motor vehicle production, the overall index should move above 50,” said analysts from IHS Global Insight. “Weak backlogs, still high inventories, and dismal job prospects should be the major drags on the total, but not enough to offset the recovery in orders and production.”

10:00 ―  Pending Home Sales Index will more than likely see their 6th straight gain in July, setting the state for further recovery in existing home sales. Last month’s 3.6% gain isn’t expected to be matched, but the consensus forecast for a 2.3% gain could help markets, especially if it coincides with recovery in the ISM survey.

“An improving housing market is like a stress reliever for the financials,” said Robert Kavcic from BMO Capital Markets.

10:00 ― With single-family housing starts rising 1.7% in July, Construction Spending should be climbing in the residential area, but stress in the non-residential sector could keep the overall index flat, following an unexpected 0.3% gain in June.

Analysts from IHS Global Insight see spending on single-family homes rising more than 3% in July, which would more offset “another plunge in multi-family spending and a fourth straight monthly drop in non-residential construction.” More optimistic than the consensus, they look for an overall gain of 0.5%.

Wednesday: 

8:15 ― Forecasters believe the ADP employment report will show 245,000 private jobs were lost in August, an awful number historically, but one that compares well with the -371k print in July or the -571k average in the first six months of the year. If true, markets will have good reason to believe that Friday’s payrolls report will show slower lay-offs in August than in July. So far, not all data are pointing in that direction: in the survey week mid-way through the month, there were 580k initial jobless claims in August, compared with 559k in July.

8:30 ― Revisions to the Productivity & Costs report are expected to be minor. The original reading found unit labor costs had been slashed 5.8% in the second quarter, allowing companies to reduce costs and boast productivity gains of 6.4%.

“This productivity growth is a remarkable achievement during a difficult business cycle,” said analysts from IHS Global Insight, who believe productivity will be revised up to +6.6%. 

They said reduced costs are contributing to low inflation, giving the central bank a green light to continue with loose monetary policy. “This will provide the Fed with a clear checkered flag to keep rates low for an extended period, thereby providing a sounder basis for a more sustainable recovery as time progresses and various fiscal stimulus programs roll off the calendar.”

10:00 ― Factory Orders are expected to rise 2% in July, based on flat readings in orders for non-durables and big strength in durable goods. The latter figured was already released last week, but its 4.9% jump was due mostly to strength from Boeing aircraft orders.  

2:00 ― With the Federal Reserve continuing to hold monetary policy at the status quo, it’s unlikely that the FOMC minutes will be groundbreaking, but markets will be looking at the headlines go gauge the general sentiment at the meeting, which was probably upbeat.

“We expect the economic assessment from the FOMC members to have improved in comparison to the previous meeting, along with little disagreement on inflationary risks and monetary easing,” the forecasting team at BBVA said. “It is likely that the committee revised up its GDP growth forecast.”

As always, any comments on the central bank’s exit strategy from their massive liquidity injections will be closely monitored.

Thursday: 

8:30 ― With just one day to go before the monthly employment figures, the weekly Jobless Claims report could gain some extra attention, even though the figures don’t have any impact on Friday’s numbers. So far, the initial claims figures for August have been disappointing, as the 4-week average moved up to 566k compared with 560k in July. That’s still lower than the 616k weekly average in June, but the numbers have a long way to fall before they indicate any stability in the labor market. 

10:00 ― Unlike its cousin index from Tuesday, ISM non-manufacturing index is not expected to hop into growth mode in August. The services sector is in distress as consumers switch to savings mode, owing to their reduced net household wealth, which leads analysts to believe that consumption is the missing link to a V-shaped recovery. The median forecast is for a score of 48.0, an improvement from the 46.4 score in July but the 11th straight month of contraction overall.

John Herrmann, president of Herrmann Forecasting, gave multiple reasons why the services sector is taking more time to recover than manufacturing.

“The Achilles heel of the US economy remains on the consumer-side of the economy: persistent, but slowing, job cuts; elevated leverage ratios; surging savings rate; endemic job uncertainty; foreclosures and delinquencies; and an overall aversion to discretionary spending.” He added: “We think the consumer turns positive very gradually over the coming two years.”

Similarly, HFE’s Ian Shepherdson said that there can be no meaningful improvement so long as the labor market continues to report massive payroll slashings month after month. 

“Consumers account for nearly 90% of the private sector economy, and yet, with the stimulus program now half a year old, the underlying rate of increase in real spending is still less than 0.1% per month,” he said.

Friday:

8:30 ― The drop in nonfarm payrolls in July was the smallest since August 2008, so the Employment Situation report for August should bring optimism to markets so long as the trend is towards continued improvement. As always, forecasts are deeply divided. The median forecast is that 200k jobs vanished in the month, a significant gain from the -247k print in July, but not all analysts are so optimistic: estimates range from -115k to -365k. 

Labor data in the month has so far been mixed. “Although the regional factory surveys released so far, along with the Conference Board’s consumer survey, showed improvements in their employment components, average initial jobless claims drifted up slightly between the survey periods,” said analysts at BMO.

As for the unemployment rate, it is set to rise two-tenths to 9.6%. In last month’s report it ticked down one-tenth, surprising many, but the details revealed that the number was only a technical gain: the labor force had fallen 442,000 as some workers gave up on looking for work altogether.

Looking at two economic recoveries in the early 1980s, BTMU’s Ellen Zentner said the jobless rate tends to peak just as the economy enters recovery, suggesting that the 9.5% rate in June will be the apex. However, she said there are plenty of reasons why the rate could inch towards double-digits as well. 

“Believe it or not oftentimes it is a return of confidence in the labor market that causes the unemployment rate to rise even the payroll job loss is slowing,” she wrote in a weekly note. “As the labor market mends those discouraged workers that previously  dropped out of the workforce will likely re-enter and, at least temporarily, drive the unemployment rate higher. For this reason we feel it is too early to call the peak in the unemployment rate.”