What Does Friday's Sell-Off Tell Us About the Economy?

The catalyst as we all know for Friday's market drop was the weak August employment report featuring a slide in non-farm payrolls of 4,000. If that wasn't bad enough there were downward revisions totaling a combined 81,000 in June and July payrolls. Manufacturing lost another 46,000 jobs lost month, and construction lost 22,000.

In the household survey, the government estimated that 592,000 people left the labor force (job leavers), and showed an "employment" drop of 316,000. There seems to be a great disparity in non-farm payroll versus household survey. I would not be surprised to see this September set of numbers revised lower in the months ahead.

The Friday sell-off was unusual in that the usual bounce back failed to materialize after 10 a.m., as the 1-minute chart (below) of the Dow shows:

Employment growth has long been heralded by the bulls as a reason why there was little chance of recession. Factors are coming together for a test of the March Dow lows at around 12,000, perhaps as early as this month.

While odds have increased for a half-point cut in the federal funds rate September 18 (25 bps has long been baked into the cake), there was disappointment in some circles that the Fed did not immediately ease by the 25 bps Friday morning.

There is no doubt that a rate cut is coming, but Bernanke seems content to sit on his hands, and wait until the 18th with the usual caveat that if things really fall apart Bernanke will show up with his "tool box" beforehand. The Bernanke Fed wants to show, imho, it's not Alan Greenspan, who probably would have cut by at least 75 bps by now.

Bernanke is also likely to be worried about this...

Yes, the dollar - once again, back at the 80 critial point of reference, and no doubt doomed to a steady chisling. But, as events unfold, and the "de-leveraging" process continues, you can bet that Bernanke will be no better than Greenspan, and will likely go from garden hose (repos and the like), to the fire hose in order to try to meet liquidity demands, and attempt to stop the recession from deepening, once we're officially in the midst of one.