This morning’s stronger than expected ADP report sparked some optimism for tomorrow’s Non-Farm Payrolls release. Over the past 12 months, ADP has consistently underestimated NFPs which means that non-farm payrolls could be much stronger than expected. The current forecast calls for job growth of 105k. The following chart shows how ADP underestimated Private NFPs 11 out of the last 13 months.
Speculation that Bank of American may need USD$34bn of capital has triggered fresh concern about the results of the stress tests on banks, which are due for release on Thursday. However despite these fears, there is growing evidence that job losses may have tempered with non-farm payrolls likely to see the smallest decline in 6 months. The 4 week moving average of jobless claims have moderated and yesterday, there was an impressive rebound in the employment component of service sector ISM.
This morning, Challenger Gray & Christmas reported the smallest increase in layoffs since September. According to payroll agency ADP, private sector payrolls declined by -491k last month, the smallest increase since October. Although the ADP report has been a poor predictor of non-farm payrolls, it has been relatively reliable directionally and therefore confirms our suspicion that payrolls declined by less than 600k last month.
Yet we still expect the U.S. economy to have lost at least 1/2 million jobs in April and for the unemployment rate to hit a 25 year high. This is indicative of weakness from nearly all perspectives, but it is a start because companies need to slow firing before they can even consider hiring. This is a step in the right direction towards a labor market recovery and why I believe the dollar will trade lower against the higher yielding currencies today.
It is the beginning of the fourth quarter and demand for US Dollars continues to be voracious, driving the EUR/USD below 1.40. In less than 2 weeks, the most liquid currency pair in the world has fallen close to 6 percent or more than 8.5 cents (850 pips).
However the dollar is not strong against everything. I have argued that in this current environment, the Japanese Yen should be the best performing currency. Therefore I expect the dollar to weaken against the Yen especially as the Dow continues to tumble. Against the Euro and British pound on the other hand, the dollar is a completely different animal.
Here is a chart of the correlation between the EUR/USD and Oil Prices for information purposes
Take Two of Bailout Drama
Although there are many reasons to explain the dollar’s recent strength against the Euro, the latest wave of buying has been triggered by take two of the bailout drama. The Senate is slated to vote on a new $700 bailout plan that includes an increase in the FDIC insurance cap from $100,000 to $250,000 this evening and then its off to House for approval. Politically, it would be damaging to both the Democrats and Republicans if the second attempt does not pass. Adding to the Euro’s weakness and the dollar’s strength were hawkish comments from Fed President Plosser and the stronger ADP employment numbers. Plosser, who is usually more hawkish than his counterparts said that he is skeptical about a rate cut even though the market has completely priced in a 25bp rate cut for October.
Don’t Believe ADP
As for the ADP, unfortunately I do not think there is any truth to the numbers especially since the report only captures the first 2 weeks of September. This would not be the first time that the ADP has overestimated non-farm payrolls. There is no question that the US economy remains weak and the big drop in the manufacturing ISM index confirms that. The index fell to the lowest level since October 2001 but what I find more interesting is the fact that the employment index dropped significantly as well.
Premature for ECB to Cut Rates
Here is the “In the Financial Papers Radio Broadcast” (Length: 05:14 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Non-Farm Payrolls Drop 80k
Dell Plans to Cut More than 8,800 jobs
Jobless Claims Indicate that Recession Has Started
Britain’s $60,000 Tax Bill
Canadian Employment Rate Jumps to 6% but Still Creating Jobs
Fed Signals More Rate Cuts as Officials Cite Market Stresses
Australian Retail SAles Weaker Than Expected
The currency market is failing to react to Bernanke’s comments which suggest that if we have a stronger non-farm payrolls number on Friday, we could see a serious bottom in the US dollar.
The ADP employment report for the month of March was much stronger than expected. However I am skeptical of the accuracy of this report given the fact that it overestimated private payrolls growth for the last 6 months.
Nonetheless, the rally in the US dollar is strong enough to not ignore.
Although this strength may be partly due to the latest losses reported by German banks ($2.5B by WestLB and $23B by Deutsche Bank and UBS combined), the shift in risk appetite is the real driver behind the move. Gold prices are below $900 an ounce which confirms that the market is less risk averse.
The markets are simply relieved that another Bear Stearns style disaster has not occured over the past few weeks. No major financial institution is at brink of a collapse and in fact, the oversubscription to Lehman Brother’s stock deal indicates that investors still have money to spend.
Yet the comments from Bernanke and the possibility of another negative month of non-farm payrolls growth indicates that has nothing has changed.