The ECB Jumps into Inaction
Market Commentary
By WSS Research Desk

By Carlos Guillen

Equity investors are demonstrating disappointment with the lack of action coming from European Central Bankers. Moreover, initial claims data failed to bring any enthusiasm to investors, as the results seem more noisy than anything else. Also, factory orders headed in the wrong direction, adding to the evidence of slowing growth for the rest of the year.

Employment data today failed to give an indication on an improving jobs backdrop as the number of Americans that filed for their first unemployment checks rose by 8,000 last week. According to the Labor Department, initial claims during the week ended July 28 totaled 365,000, increasing from the 357,000 revised figure reported for the prior week and landing in line with the Street's estimate of 365,000. Initial claims numbers had ticked encouragingly lower in the prior week, but now it seems as if there is no clear direction to the trend. Given the currently higher than normal unemployment rate and the less than expected nonfarm gains, the initial claims data this week is not giving much hope for an employment backdrop improvement. The jobless rate, which was 8.2 percent in June, has been stuck above 8 percent since February 2009. At the moment the economy is counting on consumption to give it the little bit of growth that many on the Street have already downgraded, and with jobs creation stalling, the risk is increasing that economic growth may also stall this year.

While investors were rather unresponsive to yesterday's Fed comments, today it is clear that investors had their hopes up on some form of action from the European Central Bank (ECB). The ECB took action to take no action as it left its key benchmark interest rate unchanged at 0.75 percent, it left its marginal lending rate unchanged at 1.5 percent, and left its deposit facility rate unchanged at 0.0 percent. In essence, what the ECB did was just to say what it would do if the crises worsened. Mario Draghi (ECB president) said the ECB would jump into bond markets in tandem with Europe's rescue fund if need be, independent of reservations of Germany's Bundesbank. Draghi also attempted to provide confidence by stating that "The euro is irreversible" and that the ECB may "undertake outright open market operations of a size adequate to reach its objective." So while nothing will get done in the near term, Draghi continued to convey that it will do what it takes. This was not enough for investors, which was evident in equity markets all over Europe as well as here at home.

So yesterday we had the Fed's comments, today the ECB's inaction, and tomorrow we will have the government's jobs data; clearly a week full of suspense. At the moment the Street's expectations are that the unemployment rate will remain fixed at 8.2 percent and that nonfarm employment gains will be a modest 100,000, up from June's gain of 80,000. The bar is low, so a miss on any of this will certainly be felt in equities tomorrow.

Market Nuggets

* ECB chief Mario Draghi essentially did nothing today after promising everything last week. All he says is that he will try to plan something out in the weeks ahead. Now that both Ben (Bernanke) and Mario have balked, the cheap-money-addicted markets are slumping.
* Italian president Monti says the EFSF will be used to stabilize markets rather than bail them out, and doesn't know if he will ask for Italian bonds to be purchased (he sounds a little doubtful). The markets in Italy and Spain are down 4.6% and 5.2%, respectively.
* The FacePlant continues as Facebook (FB) shares continue their horrific slide to the depths for a fifth day since posting earnings. They have now broken below $20.
* After tanking from above $10 to below $7 yesterday, Knight Capital (KCG) is down another 57% to $3 after saying it will lose more than $400 million on yesterday's trading glitch, or about 4x their annual earnings.
* Challenger, Gray and Christmas says that layoffs announcements n July were down to 36,855 from 37,551 in June, a 16-month low.
* Factory orders for June were down 0.5% versus an expected 0.7% gain.
* Jobless claims trended modestly lower for July than in June, which is an okay signal for tomorrow's employment report.

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