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Initial Jobless Claims

In a volatile summer for equities, perhaps no underlying piece of economic data has been as tumultuous and worrisome as U.S. initial jobless claims.

The claims number, released on a weekly basis, has been consistently disappointing this summer, and it's been headed in the wrong direction for an expanding economy. Thursday's seasonally adjusted claims number of 500,000 represented the fourth increase in the last five weeks and was the worst reading since November 2009.

Economic forecasters had expected a 475,000 number, which would have been a 13,000 decrease from the prior week. Instead, the claims number headed up by nearly that amount. (The four-week moving average, which smoothes out some of this volatility, is also on the rise.)

The good news about the initial jobless claims number is that it's compiled weekly by the U.S. Department of Labor, meaning the next chance for an upside surprise comes again Thursday. The bad news? It's also the next chance for another negative surprise, which at this point seems more likely.

Thursday's news spooked the markets and caused economists to take a second look at their forecasts for the August employment numbers, said Michael Englund at Action Economics in Boulder, Colo. Now he forecasts a 90,000 drop in non-farm payrolls (the number for both private-sector and government employment), compared with a prior forecast of a 30,000 drop.

"The data reinforce the view that, at the least, initial claims have stalled in 2010 at levels consistent with only restrained private payroll growth, and the recent rise in claims suggests the labour market is losing some momentum," Mr. Englund said.

Much of the summer's earlier payroll declines were driven by government - an expected reduction in census workers - but were also accompanied by weakening, but still-positive private-sector numbers. Now, says Mr. Englund, "The rapid climb in the [initial claims]numbers since the 460,000 figure in the fourth week of July signals a potential back-tracking in private payroll growth back into negative territory.

Sal Guatieri, an economist at Bank of Montreal, said it's possible claim numbers have been boosted by the layoff of temporary census workers or with the way the U.S. Department of Labor does its seasonal adjustments.

Still, " If the past is any guide, new claims probably need to drop below 450,000 to flag a sustained decline in the unemployment rate. And that's not going to happen any time soon - unless another raft of job seekers join the 1.2 million discouraged workers (three times the norm) who have already given up."

Mergers and acquisitions

Corporate cash is at modern highs, by most measures; companies are not only not hiring, they're not acquiring other companies, either.

Will that soon change, given the recent perkiness in the M&A market? We don't need to tell you about BHP Billiton's hostile offer for Potash Corp., but there have been other recent deals at hefty prices, including Intel Corp.'s plans to buy computer security concern McAfee Inc. at a 60 per cent premium.

Stéfane Marion, chief economist and strategist at National Bank Financial Group says M&A activity "has been unusually muted at this point in the recovery" thanks to economic uncertainty.

At its peak in the last two decades - the 1998 to 2000 bubble period - the total value of mergers and acquisitions exceeded 10 per cent and even reached 12 per cent of global GDPin the first quarter of 2000, National Bank's Economy and Strategy Group says, using data from Bloomberg and Thomson Reuters. After the post-bubble recession, the M&A value climbed back to the 7 per cent range, with a peak near 10 per cent in the second quarter of 2007.

Even including the bust-period depths in M&A activity, the average figure for the past 20 years is about 5 per cent. But for the last seven quarters, the figure has struggled to exceed 3 per cent, and it's actually fallen for two consecutive quarters, National Bank observes.

"Sitting on a pile of cash when many central banks are pledging to keep interest rates low for the foreseeable future does not offer much of a return, particularly if the economy actually continues to grow (albeit at a slower pace)," Mr. Marion said.

The Potash bid, he said, shows a return of "animal spirits." That deal, combined with the Intel-McAfee pairing, and the South Korean national oil company's bid for the U.K.'s Dana Petroleum, brings the total value of announced takeovers to more than $175-billion (U.S.) so far this month, making it the best month since March ($200-billion in announced deals.) On a seasonally adjusted basis, Mr. Marion says, August 2010 is already the best month of M&A activity in two years.

"If this mindset persists, we certainly have a catalyst to drive equity markets higher," he said.

Commodities

How can we be entering a double-dip recession if commodities are peaking?

That's the question asked by Scott Grannis, the former chief economist at Western Asset Management Co. who now blogs comfortably from his condo on the Southern California coast.

Mr. Grannis notes the CRB Spot Commodity Index has risen 50 per cent from its recession lows in late December 2008. Yet during the most recent rise in the index, since July, stocks have shown no returns.

"It may be that equities are simply slow to recognize the reality of ongoing global growth and the continued absence of fundamental deflationary forces that are reflected in strong commodity prices," Mr. Grannis wrote last week. "I take encouragement from this, because at the very least commodity prices tell me that the market may be wrong to fear a double-dip recession and deflation."

The CRB Spot Commodity Index consists of the spot prices of non-energy, basic industrial commodities. No oil or gas, no gold or silver. Instead, it includes roughly two dozen commodities such as zinc, copper scrap and lead scrap; wool tops, hides and print cloth; butter, corn, wheat, sugar and lard.

They are the component parts of industrial production and foodstuffs, and as their prices rise, it becomes increasingly difficult to avoid passing those prices along to the consumer. That suggests inflationary pressure, counter to the current fears by many bears of deflation.

It has not been a straight ride to the top for this set of commodities, however; this is the fifth upward run in 2010, with the previous four all followed by some sort of pullback. The up-and-down performance means the CRB Spot Commodity Index is up about 7.5 per cent year-to-date.

And, one of the drivers of the index has been wheat, whose recent highs were driven by weather and political concerns. Despite a recent pullback, it remains up 15 per cent year-to-date. Another top performer: coffee, whose supply problems have prompted a 25 per cent increase in spot prices in 2010. Many other members of the index are flat or down.

Coupled with continuing minimalist Consumer Price Index readings, the risk of deflation remains real, advocates of the scenario say.

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