Payroll Numbers Are Ugly Indeed

There is no question that the US labor market is deteriorating. Non-farm payrolls fell by -84k last month, driving the unemployment rate to a 5 year high of 6.1 percent.

What made FX traders really sell the dollar was the jump in the unemployment rate and the revisions. The US government said that 9k more jobs were lost in August than previously expected, and 38k more jobs were lost in June. Even though we did not get the -100k print that we had expected last month, the US economy did lose 100k jobs in June. Since the beginning of the year, a total of 605k jobs have been cut. We expect at least another 2 or 3 months of negative job growth before the labor market hits a bottom.

Over the past 30 years, the US economy has gone through 3 recessions and in each of those 3 recessions, there was a string of job losses that lasted for a minimum of 11 months.

This has triggered a sharp sell-off in the US dollar, driving USD/JPY towards our target of 105. The biggest weakness in the US dollar should be against the Japanese Yen. Against the Euro and British pound, this could be a temporary correction. Oil continues to trend lower while the financial markets are trading off risk aversion. The dollar is still benefitting from a flight to safety.

Weaker economic data has not stopped the dollar from rallying in the past. On a purchasing parity basis, the US dollar is still undervalued against the Euro and British pound. With the markets waiting for the Federal Reserve to deliver their first rate hike in 2 years and the European Central Bank to cut interest rates for the first time in 5 years, the expectations for completely diametric monetary policy is exactly what could drive the EUR/USD to 1.40 over the next few months or even weeks.

Comments

[Reinko:]

I once made a year long list of NFP numbers, very often they were later revised upwards. Therefore this NFP statistic is just one of the rather unreliable USA government statistics.

I don't yell 'fraud' or 'conspiracy', a more down to earth explanation is that the NFP numbers are published to early because a lot of them are still in the pipeline before they are processed properly.

2008 Sep 05 09:37 AM

[Reinko:]

Correction: The jobs lost were revised upwards.

2008 Sep 05 09:38 AM

[User 184032:]

kathy, why would yen go up so much (with gbp and euro staying low)? do you expect the 105 target is a short-term? ie, when people realize japanese economy not going anywhere, then yen will go lower? is that what you forecast? thanks.

2008 Sep 05 09:52 AM

[bbzz24:]

to have a target for the yen is equal to having idea of the volume of the existing carry positions. since the fx market is decentralized, such information is impossible to obtain.

2008 Sep 05 10:26 AM

[Jackson Cash:]

Reinko: If you think that the numbers aren't orchestrated you are perhaps too optimistic.

Every single government statistic is "fallible" and you should anticipate that no matter what [these times in particular] our government (perhaps through failure of transparency during "processing") will manipulate and sugar coat, as your calculations reflect.

It's 100% about timing and the control of information and I commend you on keeping track of such things -- just trust them as they are -- useless and inaccurate.

2008 Sep 05 10:38 AM

[Chris B:]

I wonder how the FX traders will react when they realize US interest rates won't rise significantly for the next 2 years. Rising rates would (a) drive up foreclosures when the adjustable-rate crowd decides it's not worth refinancing, (b) crush the already fragile banks when foreclosures and home prices fall even more, and (c) reduce real estate prices by another 30% or so until we've reverted to the historical mean.

Do you suppose the fed might trade that outcome for 5% inflation over the next 2 years? Um, yes... They have so far. In short, rising rates would be economic suicide right now and it won't happen until most adjustable rate mortgages are refi'd at low rates and the banks are able to shore up balance sheets. In other words, at least 2 years.

It might be time to bargain hunt overseas before reality sets in.

2008 Sep 05 12:40 PM

[carey_jim:]

There isn't any unemployment in Japan to speak of. They just put undesirable employees in a corner with a window looking to nowhere and shame them to death.

Maybe the solution to our problem is patriotism: only buy GM, Ford and Chrysler. Any American caught buying a Honda or other Japanese car will be shamed to death.

I can hear the cheering from Detroit already.

Go America.

2008 Sep 06 11:15 PM