Dow Takes Fed's "Modest" and Raises It a Notch

It looks like a good day for the Dow Jones Industrial Average (DJINDICES: ^DJI  ) . Just a day after the Fed chairman announced that the pace of economic recovery had slowed to a "modest" speed, various new data points seem to be conspiring to contradict that statement, sending the index and its component stocks soaring. As of 11:45 a.m. EDT, the Dow is up 122 points with only four components in the red.

Modest, you say? 
Though all eyes will be glued to the Employment Situation report from the Labor Department tomorrow, this morning's jobs data is looking pretty good for investors. New jobless claims tumbled last week, falling 19,000 to an almost six-year low. Though data in July can be volatile due to factory shutdowns, the underlying trend in jobless claims has continued to show improvements in the labor market. So far this year, applications for new unemployment benefits claims have dropped 12% and the weekly claims level seen last week (329,000) is close to the pre-financial crisis average of 320,000.

Also on the labor data front, the Challenger job cuts report showed a 4.2% decline in layoffs, yet another sign that businesses are making do with their smaller workforces and may soon need to expand their payroll. Since a hiring spike would influence higher consumer spending -- the largest component of the country's gross domestic product -- it is the component most investors are waiting to see in the labor market.

In other sectors of the economy, manufacturing data shows a surge during July as more orders propelled the U.S. manufacturing sector to two-year highs. According to the Institute for Supply Management, new orders climbed during the last month, increasing the pace of new manufacturing. One small bit of negative data was a 0.6% decline in construction spending for the month of July due to continued drops in governmental construction spending. Though usually a bright spot in the construction data, housing was flat during the month as remodeling gains offset a slight decrease in single-family homes construction.

Flying financials
Bank of America (NYSE: BAC  ) and American Express (NYSE: AXP  ) are leading the index higher this morning, with gains of 2.09% and 2.63%, respectively. Despite the news yesterday that the companies will have to start charging lower fees for debit-card transactions, investors may be more pleased with the implications of the macroeconomic news than they are concerned about lost revenue. JPMorgan (NYSE: JPM  ) is also up this morning, by 1.5%, and will see a decline in its fee revenue as well.

What investors should remember is the chaos that ensued the last time the cap on transaction fees was reduced. Since the banks and other financial firms that issue debit cards -- with Visa (NYSE: V  ) accounting for 30% of all card transactions -- stand to lose out on millions of dollars as the cap is lowered from $0.21, they will be forced to find new ways to offset that decline.

Two years ago, a similar situation occurred when the current cap was instated -- banks and other firms had been charging up to $0.44 per transaction prior to the Fed stepping in. In an effort to offset the loss in revenue, Bank of America and others instated a $5 fee for debit customers, resulting in an outroar and eventual rescinding of the fees. Banks will need to be careful how they address the gap this time around, since investors and customers may be waiting for their response.

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