Positive Labor Market Report

The debt ceiling debate continues to monopolize headlines, even as a barrage of earnings reports and a surprisingly positive labor market reading try to gain the market’s attention. Weekly Jobless Claims numbers dropped by a bigger-than-expected level, which if sustained in the coming weeks will represent a significant positive for the economy.

Weekly Jobless Claims dropped 24 thousand to 398 thousand, dropping below the all-important 400 thousand level for the first time in 16 weeks. The four-week average, which strips out the week-to-week volatility inherent in this series, dropped 8.5 thousand to 413.7 thousand.

I don’t want to get too excited by this positive number as the claims data is prone to bouncing around from week to week. But if this trend remains in place over the coming weeks, this could be an early sign of that second-half economic recovery everyone has been hoping for. And that would certainly be something to get excited about.

But before anything else can happen in the U.S., we need to put the debt ceiling issue behind us. The most likely outcome in this debate is an 11th hour temporary increase in the ceiling that leaves the thornier deficit reduction issue for a later date.

And given what the rating agencies have been saying all along, such an outcome will not be good enough to avert a rating downgrade. But it is hard to argue that such a rating downgrade will come as a surprise to the market. While the loss of the ‘AAA’ rating would be a net negative for the economy, it would not be not as material an event as some have been fearing.

The headlines may not tell you this, but don’t forget that we are in the midst of the earnings season. And by all measures, it has been a solid performance thus far. Though I must add that the reports this morning have been kind of mixed.

We had a solid top- and bottom-line beat and positive guidance from DuPont (DD). But oil super major ExxonMobil (XOM) missed expectations, even as volumes and capital expenditures were up significantly from the year-earlier level. SprintNextel (S) reported a noisy quarter, with a bunch of moving pieces that make it difficult to get a clear picture on first read. The third-largest carrier in the country lost a greater-than-expected number of contract subscribers in the quarter, continuing its struggle in this lucrative market segement.

Colgate Palmolive (CL) came ahead of EPS and revenue expectations, though margins remained under pressure despite pricing gains. Avon Products (AVP) came modestly short of expectations. Homebuilider D.R. Horton (DHI) came out with an earnings beat, but missed revenue expectations on weak order flow. Results at fellow homebuilder PulteGroup (PHM) were significantly weaker than expected.

The best news of the day is on the labor market front, where we saw a sharp drop in the initial claims numbers. If the Washington drama wasn’t monopolizing everybody’s attention today, this news on its own would push stocks higher. But we can’t wish away the debt debate.

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