Economic Outlook: Fundamental in a funk

A market lull turned volatile Thursday before the Independence Day break, with U.S. markets plunging on an uptick in unemployment.

The grim numbers are increasingly familiar: Manufacturing jobs declined 136,000 in the month of June on a decrease of 1.9 million since the recession began. Construction shrank by 79,000 jobs in the past 30 days and by 1.3 million in the past 19 months. The professional and business service sector shed 118,000 jobs in June, 1.5 million since December 2007.

Investors were startled by the acceleration following two months of declines. But the cumulative numbers were also bound to slice through the political scene and take the legs out from under a second quarter rally that had already begun to wear thin.

Republicans were quick to pounce on the 26-year high in unemployment as a sign the $787 billion stimulus package was not working.

For investors, the 9.5 percent unemployment rate rattled confidence just before a corporate earning season that begins Wednesday with Alcoa's report on the second quarter.

Corporate reports will have little competition for a while, as the week includes few government reports that will turn markers one way or another. Policymakers at the Reserve Bank of Australia will announce an interest rate decision Tuesday, but economists predict they will hold key lending rates at the current 3 percent. The Bank of England and the Bank of Japan could also change rates this week, but few expect them to do so. A U.S. trade balance report is due Friday.

A Group of Eight meeting begins in L'Aquila, Italy, Wednesday. Leaders of emerging economies are expected to question the U.S. dollar's role as the primary reserve currency given the weakness in the U.S. economy.

Underneath the fundamental weakness in employment, investors are also keeping an eye on the instability of the oil market, The New York Times reported Monday.

Escalating oil prices created fearful headlines a year ago as the price rose above $147 per barrel -- a dramatic rise that was oddly detached to news economies were beginning to crumble.

The oil market eventually caught on, sending oil to nearly $30 per barrel. Since then, however, oil prices have more than doubled, while economies remain weak.

"Crude oil prices appear to have been divorced from the underlying fundamentals of weak demand, ample supply and high inventories," a recent report from Deutsche Bank said.

But a report from the Center for Global Energy Studies pointed to quota discipline at the Organization of Petroleum Exporting Countries and the simple motivation behind it. "Neither the organization, nor its key members, has any real interest in halting the rise in oil prices," the report said.

Asian markets on Monday turned lower, following Thursday's 2.63 percent drop in the Dow Jones industrial average.

On Monday, the Nikkei average in Japan fell 1.38 percent. The Hang Seng index in Hong Kong dropped 1.23 percent. The Singapore Straits Times fell 1.46 percent, while the S&P/ASX in Australia dropped 1.16 percent.

In midday trading in Europe, the FTSE 100 in London fell 1.33 percent. The DAX 30 in Frankfurt fell 1.61 percent. The CAC 40 in Paris lost 1.54 percent, while the broader DJStoxx 600 slid 1.65 percent.