Market and economic update: U.S. markets worry about European slowdown

After the important September employment report, last week’s release of September Federal Open Market Committee (FOMC) meeting minutes and August data for job openings and turnover seems to pale in comparison. However, the FOMC minutes indicated the committee discussed concerns about the impact on the U.S. economy from slowing growth across the eurozone.

We believe the U.S. economy will likely weather the slowdown in Europe, and the Federal Reserve remains on pace to raise short-term interest rates by mid-2015. Further recovery in the jobs market will likely be required. Headline employment has seen a strong recovery, and weekly initial claims data indicate the strength is likely to continue. The August Job Openings and Labor Turnover Survey (JOLTS) confirms that indication, although data for hires and quits remain below the peak in 2007. The recovery in hires and quits remains a key indicator for Fed Chair Janet Yellen regarding the health of the labor market recovery.

The August decline of German industrial production by 4% indicated activity has been slowing faster than the market anticipated based upon purchasing manager survey data, raising fears of slower global growth. The European Central Bank has reduced short-term repo rates to near zero and reduced the deposit rate below zero. It continues to explore quantitative easing via the purchase of asset-backed securities and easing liquidity conditions through targeted long-term refinancing operations. We expect these policies to provide some modest lift to the economy, but they will likely fall far short of accelerating economic growth.

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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank. 

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