22-Year-High Jump in Unemployment Hits Stocks and Dollar

The NFP lottery results are out. The US dollar slipped against many currencies such as the Euro, Swiss franc and British pound when it was reported today that the US unemployment rate jumped to 5.5% in May from 5% percent in April, much worse than the 5.1% expected by most market participants. Not only is the unemployment rate higher than expected, the 0.5 percentage point increase is the biggest one-month gain since February of 1986, and this unemployment rate is at the highest level since October of 2004. With this number in mind, many investors aren’t too pleased with the better-than-expected loss of jobs - payroll employment fell by 49,000 jobs in May, compared to the forecast of 60,000 jobs cut. This follows a revised loss of 28,000 jobs in April (- 20,000 jobs originally reported).

Job losses are inevitably underestimated in the federal government stats and they are probably much higher than surveyed, but still, the 5.5% unemployment rate will no doubt affect the sentiment of traders and consumers. We are now staring at the fifth straight months of job losses, and people are wondering again about the R word, that is Recession. Following the NFP release, the White House said that the jobs data is “not a report we wanted to see” although it is consistent with the slowing economy. Can American households withstand the weak job market and still support the economy with their diminishing disposable income? We’ll have to wait and see.

Meanwhile, in the currency markets, EUR/USD spiked up to a session high of 1.5704, and if it can break above 1.5720 successfully, it could next aim for 1.5760, then 1.5800-10. 1.5630 is the nearest support. USD/CHF has broken below the symmetrical triangle and hit a low of 1.0250. The British pound also rose against the US dollar, rallying above 1.9600, with 1.9680-1.9700 a possible long profit-taking zone.

In the stock markets, the Dow fell more than 200 points today on the jump in the unemployment rate. American International Group (AIG) fell more than 5% to post the sharpest decline in the Dow because of an SEC investigation into how the company accounted for credit-default swaps (contracts conceived to protect bondholders against default), including those backed by subprime mortgages.

Comments

[whidbey:]

Interesting that you suspect the figures on employment are questionable. But even more interesting are the implications of the employment decline; it is usually believed by economists to confirm that a recession. So what does it mean in light of the oil jump, does that equal stagflation? If the NFP is low then things are perhaps worse. Overall, you might have said the verdict is in. Now, how long will it last? Maybe we are well past the midpoint. I hope.

2008 Jun 06 04:30 PM

[Ernest Wong:]

On a big down day in the global stock markets, does not seem like there are too much unwinding of the carry trade -- EUR/JPY and CHF/JPY both broke out of their triangle patterns indicating more upside to come. The CHF/JPY even made new all-time high. Stay long...

2008 Jun 06 05:20 PM

[beandog:]

Don't worry, we're gonna be ok.

Benanke will save us.

beanieville.blogspot.c...

2008 Jun 07 11:05 AM

[CLH:]

Wong--I agree. The unemployment is not high. (Look at Europe who have had 8-12% unemployment for 20 years). Some unemployment is good because it keeps wages and inflation down. Profits are high. Most of the unemployment are the young grads who will take jobs finally but wont ask for the moon.

Thanks for the information on the carry trade. Stay long!

2008 Jun 07 11:08 AM

[Richard Men...:]

The US unemployment rate is actually understated, since it doesn't include "discouraged" workers who are not actively seeking work, nor underemployed workers who are working part-time or for significantly less than earnings in previous jobs. It also fails to take in people who are working "off the books" to avoid taxes--a number that has probably risen given the current level of consumer distress. Given these factors, it is next to impossible to compute what the rate of unemployment really is.

2008 Jun 07 06:48 PM