Will Non-Farm Payroll Numbers Trigger a Rate Cut?

Will Non-Farm Payrolls Push the Fed to Cut Interest Rates?

September non-farm payrolls are due for release on Friday and now more than ever the level of job losses could determine whether the Federal Reserve will cut interest rates this month and by how much. The US dollar hit a one year high against the Euro Thursday morning, but has remained weak against the Japanese Yen. This divergent price behavior has been primarily due to the market’s adjustment of ECB interest rate expectations. However should non-farm payrolls be particularly bad, it would suggest that the Fed could cut interest rates and cut them aggressively, triggering a turn in the EUR/USD that would make its price action more in line with the sell-off in USD/JPY.

Job Losses to Continue for Ninth Straight Month, NFPs Should Fall by More than 100k

For the first time in this cycle, the market is looking for non-farm payrolls to fall by more than 100k. This would mark the ninth consecutive month of job losses but it would not be the first time that non-farm payrolls have actually dropped by the psychologically hobbling 100k amount. In fact, we believe that non-farm payrolls could fall as much as 130 to 150k and even if it falls short of our forecasts, the market’s price action reflects their expectations and everyone still expects the labor market to worsen. The 4 week average of jobless claims and continuing claims remain at 5 year highs. Claims are usually not subject to significant revision and are therefore very reliable leading indicators for NFP. Also, we have not heard the last of the layoff announcements. With market caps taking a bit hit and lending difficult to attain, US companies are tightening their belts and cutting back.

Of the 76 economists surveyed by Bloomberg, the most optimistic forecast is by Morgan Keegan & Company who calls for only a 13k drop in non-farm payrolls and the most pessimistic is Deutsche Bank who is calling for a 175k drop. Even though the US economy is not in an official recession, many people argue that the current problems are unprecedented. Therefore it is worthwhile to take a look at how bad things got for the labor market in prior recessions. Over the past 30 years, there have been 3 recessions and in each of those recessions, we have seen at least 11 consecutive months of job losses with at least one month where non-farm payrolls fell more than 300k. If this downturn is much worse than what we have seen since the Great Depression, we would not only expect job losses to continue into the end of the year but for the losses to grow.

However as pessimistic as we are, it is important to point out there are arguments for an improvement in non-farm payrolls:

Arguments for More or Less than 100k Drop in NFP - Continue Reading

Comments

[User 143167:]

The effective Fed Fund rate has been around 1.25% for about two weeks, which means the Fed has in facto cut 75bps already. They just not announced it. Ben B. is too clever trying to pump cheaper credit by off-balance sheet rate cuts so as to ecaspe the future finger pointing as we now do to Greenspan.

2008 Oct 02 01:12 PM

[Smarty_Pants:]

Does it really make any difference to the economy as a whole? Borrowing at the discount window is being used to meet reserve requirements, not generate business.

At this point a loan from the discount window is an expense only at any rate.

The bank shaped balloons have giant holes in the back. The FED is pumping as fast as they can with all the extra 'air' flowing freely out the hole, all in the name of keeping the balloon shaped like a bank instead of letting it collapse into a heap. Lowering the wages paid to the guy at the pump won't help solve the problem.

2008 Oct 02 04:31 PM

[cjct:]

I don't think there's any cause for the Fed to lower rates any more because it's clear that rates are not the issue, is the complete unwillingess of banks to lend to each other. The only measures that have proved even mildly effective have the been the liquidity injections in the money markets. Even as the Fed has lowered rates over 300bps it has done nothing to bring down the cost of borrowing for businesses or the consumer (just look at mortgage rates).

2008 Oct 02 04:49 PM

[NOWHEREMAN:]

The consumer has seen a tax hike of almost 1.5% on all of his outstanding debt in September. He just does not realize it yet.

Do you have a Home Equity line, Credit Card debt, a Car loan" Read the fine print. All of them have one thing in common; the rates are adjusted at XYZ + LIBOR. LIBOR jumped 50% in September. The "XYZ" is directly linked to the Official Discount not to trading values.

This is a TAX hike pure and simple, If the Fed does not act to alleviate its effect, the consumer may really toss in the Towel and foreclosures of every type will snowball.

LIBOR continues to rise as Nero fiddles.

2008 Oct 03 10:30 AM

[Urbane Gori...:]

I agree with cjct. Lowering rates is not effective, and if we **really need it*** Heaven help us if we are tapped out. having said that, I think the market is expecting one, and if it doesn't happen we'll see a further 350 point drop. (about $500 billion capitalization) ...

jegan ;-)

2008 Oct 03 10:20 PM