I was on Fox Business earlier this afternoon talking what is moving the dollar and the short / medium term outlook for the currency market. Here is the clip, I am the first interview.
The US dollar is selling off aggressively ahead of Friday’s non-farm payrolls report on the fear that for the second month in a row, job losses may have topped 500k. The recent moves in the currency and equity markets suggest that everyone expects a very weak labor market report. Although the consensus forecast is -520k, the whisper number is closer to -650k to -700k. Sentiment is strongly skewed in one direction which can be dangerous considering the fact that some of the leading indicators for non-farm payrolls call for a rebound. The Non-farm payrolls report is the most market moving release for the currency market and it should live up to its volatility inducing reputation.
Why Non-Farm Payrolls Could Rebound in December
For many Americans, 2008 has been a year unlike any other. Companies across the nation have been forced to tighten their belts and move into survival mode, accelerating layoffs towards the end of the year. With the December numbers, more than 2 million Americans will have lost their jobs in 2008. In fact, jobs were cut every single month last year. Although everyone expects very weak job growth, there is reason to believe that we may see a rebound in non-farm payrolls. First, the employment component of Service sector ISM, which is one of the most reliable leading indicators for non-farm payrolls improved in December along with the University of Michigan Consumer Confidence Index. Since the US is a service based economy, the slower pace of job losses in the ISM report suggests that we could see a rebound in non-farm payrolls.
In addition, every single time that we have seen non-farm payrolls fall by more than 500k, there is a steep rebound the following month. In the past 50 years, we have had 3 cases where more than half a million jobs were lost in one month and in every single one of those cases, NFPs rebounded close to 50 percent. The improvement in service sector ISM suggests that the rebound could be seen again in December.
12 Consecutive Months of Negative Non-Farm Payrolls
With that in mind however, non-farm payrolls will still be weak and the unemployment rate will rise as all of the leading indicators for non-farm payrolls point to more job losses. The main reason why the whisper number is around -650k to -700k is because private sector payroll provider ADP reported that 693,000 jobs were cut last month. Given that non-farm payrolls came out worse than the ADP report every single month last year, this has led some people to believe that job losses in December could have been the largest in 5 decades. Unemployment rolls are also continuing to grow with the 4 week average of jobless claims and continuing claims at 26 year highs. Layoffs have risen 274.5% while online job ads have declined. Despite the rebound in the employment component of service sector PMI, the index remains in contractionary territory while the record low hit by the Conference Board’s report of consumer confidence offsets the improvement in the University of Michigan data.
Here’s how the 10 leading indicators for non-farm payrolls stack up for December:
2008 has been a crazy year in the foreign exchange markets and hopefully 2009 will bring more steady times for the global economy as a whole. The tremendous amount of fiscal and monetary stimulus that central banks around the world have doled out should begin to have their effect in the second half of the year. Countries that will be the first to rise from the ashes are the ones whose currencies have lost the most value in 2008. In contrast, the countries whose currencies soared will have a much more difficult time recovering.
In 2009, we will be celebrating the 10 year anniversary of the Euro and in January, people around the world will cheer the inauguration of brand new US President. Obama embodies change and hopefully that change will help to pull the US economy out of recession.
Make sure you read my 2009 currency forecasts. I talk about what I expect fundamentally and technically for the following currencies in the year ahead.
Also, I will be soaking up some sun in the Bahamas from Jan 2 – Jan 6, so there will be no new blog posts until January 7th.
Update – 5 Reasons Why the British Pound is Being Pounded – Access my latest article Feb 28, 2010
How Did the British Pound Trade in 2008?
The British pound was one of the worst performing currencies in 2008. It fell to a 6 year low against the US dollar and record low against the Euro in addition to selling off against every other G10 currency. The overwhelming weakness in the currency is a direct reflection of the impact that the credit crisis had on the UK economy. In the month of December, many currencies recovered against the US dollar, but unfortunately the British pound was not one of them. Although the pound could continue to weaken in the first quarter, the government’s aggressive fiscal and monetary stimulus should help the country recover towards the end of 2009.
Official Recession in 2009
Without two consecutive quarters of negative GDP growth, the UK economy is not technically in a recession but that should change in the first quarter of 2009, when the 2008 Q4 GDP numbers are released. Growth has been slowing materially and the weakness is reflected in the British pound. GDP growth fell by 0.6 percent in the third quarter, the largest decline in 18 years. The housing market and the financial sector have been the engine of growth in UK for the past few years and both blew up in 2008. Unfortunately the worst is probably not over for the 2 key components of the UK economy, particularly following the Bernie Madoff’s Ponzi scheme. In addition to losses suffered from the subprime mortgage crisis, many large hedge funds and European banks invested with Madoff’s. In 2009, they will be forced to write down those losses and deal with what could be pretty severe consequences for the financial sector as a whole. With the financial and housing market sectors expected to remain weak in the first half of 2009 and layoffs predicted to rise, GDP growth could fall as much as 2 percent next year. Although we believe that the country could be one of the first to recovery from the global economic downturn, this will not before more pain is felt in the UK economy. The severity of the UK recession will be largely dependent upon how quickly the credit markets are restored in 2009.
Inflation to Fall Back to 2%
How Did the Euro Trade in 2008?
Exactly one year ago, the Euro was trading at approximately 1.47 against the US dollar, 5 percent higher than current levels. In 2008, this type of move is considered mild especially when compared to the Euro’s 20 percent rally against the British pound and New Zealand dollar and 27 percent decline against the Japanese Yen. However the mild year over year change in the EUR/USD masks a tremendous amount of volatility during the year. In the first half of 2008, the EUR/USD soared to a record high above 1.60. After that, it fell 22 percent to a 2 year low but recovered more than half of those losses in the month of December.
Eurozone’s to Underperform in 2009, Expect a Prolonged Recession
It is no secret that 2009 will be a tough year for many countries, but things will be particularly difficult in the Eurozone. Every major central bank has cut interest aggressively, driving their currencies significantly lower in 2008. The ECB on the other hand has been reluctant to follow suit, leaving the Euro only marginally lower for the year. Although the Eurozone is in a recession, growth has not been nearly as weak as the US. Annualized GDP growth in the Eurozone during the third quarter was +0.6 percent, compared to -0.5 percent in the US. The Eurozone’s outperformance in 2008 however could be short-lived as the central bank forecasts a 1 percent contraction in growth next year. As an export dependent region, the strength of the Euro will make a recovery difficult. German companies have already scaled back production as global demand eases. Looking ahead, unemployment is expected to rise, slowing consumer spending and forcing the ECB to continue to cut interest rates. If German unemployment hits 9 percent, we could easily see Eurozone rates hit 1 percent.
ECB Could Become One of the Most Aggressive Central Banks in 2009