I was one of the few analysts calling for a potential rebound in non-farm payrolls in the month of December (Non-Farm Payrolls Preview: Could We See a Rebound) and that was exactly what we saw this morning. 524k jobs were lost in the US economy, which is modestly better than the -586k revised loss for November. In the past 5 decades, we have seen a rebound every single time job losses topped 500k, and this time it was no different. The employment component of service sector ISM which rebounded last month has once again proved to be one of the most reliable leading indicators for NFP. We have a service based economy and the rebound in the employment component of ISM was a strong signal that we could see a rebound in payrolls. However, the rebound is far more modest than what we have seen in the past and the unemployment rate jumped from 6.8 to 7.2 percent, is the highest level in close to 15 years.
Despite the better than expected number, if you need proof that the US economy is in bad shape, the latest non-farm payrolls report certainly provides it. In the course of 2 months, more than a million Americans lost their jobs, totaling 2.485 million jobs lost in 2008.
We will probably not see the new assault on the US dollar that traders were expecting since NFPs matched expectation, but in the long run the data is nothing to cheer about. An unemployment rate of 7 percent was the big number that everyone was focusing on now that the unemployment rate has exceeded that level, it will force more creative measures of stimulus from the Federal Reserve.
Rebound is a Precursor to More Losses
We have just endured one of the worst strings of job losses that this generation has ever seen and unfortunately the pain will continue. Companies are tightening their belts and are in survival mode. Alcoa and Intel have already announced layoffs. Fourth quarter and first quarter earnings will be very weak. To shore up their stock prices and plan for a recovery, many companies may be forced to announce more layoffs.
The US is in recession and in previous recessions, job cuts have lasted for at least 15 months. So far, we have only seen 12 consecutive months of job losses which means that non-farm payrolls will not turn positive until the second half of the year.
There was nothing good report as the pace of job losses in the manufacturing sector accelerated while average weekly hours and earnings declined.
Here is the “In the Financial Papers Radio Broadcast” (Length: 6:46 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Non-Farm Payrolls Fall by 20,000 in April; Unemployment Rate Unexpectedly Falls to 5%
Fed Raises Emergency Auctions to $75 Billion to Counter Liquidity Shortage
Euro’s Bull Run Shows Signs of Weakening
Renters Face Shortages
Private Equity Firms Stop Paying Cash Interest
Eurozone Growth Becoming a Growing Problem
Stock Market Performance Around the World
Here is the “In the Financial Papers Radio Broadcast” (Length: 07:49 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Jobless Claims Breach 400k
Bernanke Says Recession May be near
US Slowdown Takes Toll Across the Globe
US Factory Orders Fall for Second Month in a Row
Credit Crisis May Advance European Cross-Border Bank Rules
Making Sense Of Mixed Signs On Recession
Troubles in the UK
Australia prospers from China’s resource needs
Japan opposition in no hurry to fill BoJ post
Why the euro is unlikely to eclipse the dollar
Here is the “In the Financial Papers Radio Broadcast” (Length: 09:14 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Dollar Falls on News that Lenders will Seize Carlyle Capital Assets
US Retail Sales Decline in Feb
Australian Employment – HOT
Fed believes US will Avoid a Deep Recession
Bank of Japan: Leadership Vacuum?
Oil Prices $110
Gold Prices Above $1000
Dont’ Expect China to Save the World
Finance Chiefs are Downcast on US Economy
The US dollar has fallen to a record low against the Euro and an 8 year low against the Japanese Yen this past week. Here are 5 reasons why I think the weakness will continue:
1. Non-Farm Payrolls Will Continue to Fall
For 2 months in a row, jobs decreased in the US economy. I expect these numbers to worsen over the next few months because the current state of the labor market is nothing compared to the 15 consecutive months of negative job losses between 2001 and 2002.
2. The Federal Reserve is on High Alert
Not only are Fed Fund futures pricing in a 98 percent chance of a 75bp rate cut on March 18th, but the Federal Reserve is on high alert. For lack of a better description, they are “freaking out.” This morning, they announced moves to pump 200 billion dollars into the banking system to ”address liquidity pressures in the funding markets.” Although they denied that this was related to the weak jobs report, the timing is certainly suspect. The announcement may have been aimed at preventing a non-farm payrolls induced collapse in the stock market, which worked for about an hour before stocks completely reversed all of its gains.
Two year bond yields are also currently yielding slightly more than 1.50 percent while the Fed Funds rate is at 3 percent. That difference of 150bp means that in order for the gap to be neutral, the Fed would need to immediately cut interest rates by 150bp. Since 1990, the average spread between the 2 year treasury rates and Fed funds is approximately +50bp and over the past 10 years, it is +25bp. Therefore it is not rocket science to see that a gap of -150bp is a huge discrepancy and tells us that the Fed could bring rates down to as low as 1.50 percent. Lower interest rates equal a lower US dollar.
3. Retail Sales Could be Negative Next Week
Retail sales could also be negative next week which would lead to another round of dollar selling. 34k jobs were cut from the retail sector and according to the following WSJ chart, sales at most retailers other than discounters have been weak. With gas prices skyrocketing, foreclosures hitting a record high, the labor market weakening and confidence at a record low, discretionary spending may be the last things on the consumer’s mind.