Labour Day, somewhat ironically, is the last collective day of rest for American capitalists. Today, refreshed, they return to their desks ready to put into action plans hatched on the beach. So what lies in prospect for the markets in September?

The US economy is flashing a number of contradictory signals. From a jobs perspective, it is already in recession – the jobless rate has risen by a full percentage point over the past year to 5.7 per cent. Yet decent year-on-year GDP growth of 2.2 per cent in the second quarter should mean relatively few layoffs – the consensus is for 75,000 job losses in August’s employment report, due to be released on Friday.

Similarly the equity market appears caught in two minds, with views among equity investors split between complacency and millenarian pessimism. The S&P 500 is down 12 per cent in the past 12 months. But while financial stocks have dropped by 38 per cent in the same period, S&P industrials have merely paced the market. Meanwhile aggregate forecasts suggest a remarkable 24 per cent earnings growth is pencilled in for 2009 (a still rapid 14 per cent growth if an expected rubber-like rebound in financials is excluded).

Clues to whether such optimism is realistic will start to emerge as the corporate bond market wakes up after the summer lull. New debt issuance priced near the 8.25 per cent yield that insurer AIG recently paid on $3bn of 10 year debt – more than twice the spread over Treasuries paid in December – would mean tough financing conditions hitting the real economy. It would also indicate that investors remain extremely wary – a Credit Suisse proprietary risk appetite index puts confidence close to the panic levels hit in past financial crises. This will persist at least until the investment banks report in mid-September and clarity emerges over Fannie Mae and Freddie Mac.

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