Employment Figures Mean Big Fed Cut, More Dollar Weakness Likely

For two months in a row, the US economy lost jobs. This is bad, but not as bad as it will get in the coming months. In yesterday’s Non-Farm Payrolls preview, I warned that payrolls in the month of February could fall as much as 100k. Although it wasn’t that weak, a drop of -63k is much worse than the market expected.

This seals the fate for the Fed rate decision in less than 2 weeks - they will have no choice but to cut interest rates by 75bp. I expect the labor market to continue to worsen. Two back to back months of job losses is still nothing compared to the 15 consecutive months of negative job losses between 2001 and 2002.

The dollar sold off against the Japanese Yen, but held steady against the Euro because the most immediate implication of this number is risk aversion. Carry trades have all sold off in anticipation of a weak Dow open.

Job losses were seen in nearly every sector aside from travel, government and the health care system. Excluding the public sector, private sector jobs actually dropped 101k. Meanwhile the unemployment rate fell to 4.8 percent as more people gave up looking for jobs. Average weekly hours and wages both remained unchanged from the prior month.

Looking ahead, I still expect further dollar weakness as the weak labor market will force the Fed to bring rates down to as low as 1.5 percent. USDJPY is headed to 100 and EURUSD is headed to 1.55.

One other thing, the retail sector also shed jobs, which signals that retail sales in February could be negative as well.

Comments

[ikkyu:]

WHat? I thought i just saw you on Bloomberg saying the yen had bottomed.

2008 Mar 07 09:34 AM

[gatekeeper:]

RE, "..they will have no choice but to cut interest rates by 75bp..."

With rates so low already, it's hard to imagine that additional rate cuts will really be meaningful in inspiring borrowing, etc., to get the economy restarted.

On the other hand, we have new retirees who cringe when another rate cut is announced. What makes this particularly painful for these retirees - e.g., baby boomers - is that their pension plans were eliminated and replaced with 401ks which they now have to invest and survive on the resulting income, along with SS. These investments inevitably involve rate sensitive instruments. Rate cuts now and in the future do and will have a rapid and direct impact on this growing segment of the population.

2008 Mar 08 12:17 AM

[Greg Pinelli:]

Well..Ms Lien...you've forced to finally concede you the award for the "Alpha Article that Most Resembles a Fifth Grade Market Summary." The "carry trade" has completely..finally..a... unwound? To zero?
Housing prices have been tanking for months...houses are peoples MAJOR source of spending power..and you think consumer spending will show a setback in February? Brilliant.
If this is all you have to contribute..and I use the word generously...perhaps you could forego the pleasure of heaping it on us...

2008 Mar 08 10:53 AM

[Brian in Mo...:]

Interesting,
For a Boomer Economy, it's possible that rate cuts may hurt more than help stimulate the economy.

2008 Mar 08 11:15 AM

[Ames Tiedeman:]

Buy the Canadian Dollar. It will move to 1.25 vs. the U.S. Dollar. I do not see the Euro going higher than 1.60. I just don't see it. The Yen can go to 80, however. Buy the currencies that we have the greatest trade deficits with. These currencies are in Asia and even buy Mexico, yes Mexico.

2008 Mar 08 04:51 PM

[SavCD:]

Kathy,

Your number of 100,000 job losses is right if you net out the category with the big job increases - Government added 38,000 people!

2008 Mar 09 10:18 AM