Non-Farm Payrolls: Enough for a Fed Rate Cut?

Non-farm payrolls dropped by 159k last month, 50 percent more than the market expected. Even though there was a minor upward revision to the August data, the Fed will have no choice but to cut interest rates at the end of the month. Fed fund futures are pricing in a 50bp rate cut by the Oct 29 meeting but we believe that the number is not bad enough to cut by 50bp because the central bank will want to save some ammo for the remainder of the year in case the bailout plan fails to stimulate the markets.

Traders Reluctant to Sell Dollars Ahead of House Vote

Interestingly enough, the US dollar initially fell against the Japanese Yen and Euro but quickly recuperated its gains. With the market embroiled in uncertainty ahead of the House’s vote on the bailout plan, traders were reluctant to aggressively sell US dollars because the ugly NFP number nearly guarantees a passing of the plan. The reaction to the NFP number also tells us that the whisper number could have been somewhere around -200k.

NFP Could Fall by -200k Next Month

Given that this is the ninth consecutive month of job losses in the US economy, and the largest decline in payrolls since March 2003, no one can argue that the labor market is not in bad shape and we expect it to get worse. We haven’t seen the end of job losses and in fact, we expect to see a month of -200k NFPs before the labor market hits a bottom. There was no silver lining in the details of the employment report. The unemployment rate remained at a 5-year high of 6.1 percent while average hourly earnings and weekly hours slipped. Not only are Americans having difficulty finding jobs, but they are making less as well. These two ingredients spell more trouble for the US economy which is why it is time for the Fed to cut interest rates.

Big Question: Will the EESA Plan do the Trick?

The House is set to vote on the TARP/EESA plan around 12 to 12:30pm ET and we should see the results in the early afternoon. The approval of the bailout plan could lead to a relief rally in US stocks, but the question here is not whether the plan will be passed, but whether it will do the trick of unfreezing the credit markets. House Speaker Pelosi said that she would not schedule a vote on the $700B bailout plan unless passage is certain. The bottom line is, banks are not willing to lend to each other. The US economy remains very weak and the crisis of confidence that has frozen the credit markets may not be solved by a plan that focuses on recapitalizing banks and not creating jobs. This shared sentiment has put the Dow within an arm’s reach of 10,000 as a few hundred point swings have become the norm. Therefore we still expect the dollar to remain under pressure against the Japanese Yen, and as for the Euro, today’s data is not bad enough to warrant a 50bp rate cut in the Fed funds rate, which means that we may also see a relief rally in the EUR/USD.

Comments

[venividivici:]

Ah just enough time for another demented rollicking rally before the whole thing implodes.

2008 Oct 03 09:54 AM

[whidbey:]

It seems only reasonable that the rate cut will be held back to see what the Treasury plans achieve, if anything. If the actions are slow in execution, or draw no relaxation of credit, the US financial market is in serious trouble as compared to the discomfort experienced so far. Meanwhile unemployment grows for a time, making credit a moot issue in any recovery. They forgot the consumer who lies in ruins at the bottom of the pile. I think it is NOT good.

2008 Oct 03 10:43 AM

[Smarty_Pants:]

And the next domino starts to topple:

Per Bloomberg:

Schwarzenegger Tells Paulson States May Need Loans

California needs $7 Billion to cover short term cash flow shortages. Any guess how often these shortages will recur? Is it going to be $7 Billion per month?

Expect Congress to continue raising the debt ceiling repeatedly over the next several years.

I believe this might qualify as "spiraling out of control".

www.bloomberg.com/apps...

2008 Oct 03 11:21 AM

[NOWHEREMAN:]

It depends on what the EU does over the weekend and then what LIBOR does pre-market monday morning.

Shanghai starts trading after a weeks' hiatus.

But the real trigger could be as little as a move below 10,000 on the DOW and 4000 on the Transportation averages. Transports below 4000 would Re-confirm the Bear not a good sign to chartists or technicians everywhere.

The Month of October could very easily be as bad as September as earnings come in and future forecasts are slashed. If the Fed waits too long, Wall street's carnage will contribute to the ongoing deflationary pressure.

2008 Oct 04 08:31 AM

[sabbadoo32:]

Dropping rates within the next 75 days won't do a thing. As we all know credit is too tight. Banks don't trust each other, much less the average person on the street. In Chicago, banks are requiring 12-15% down on people with 700 credit scores for car loans. AND that's only if they're not purchasing an SUV.

So lower rates may be a good thing. But it's a wasted effort until someone wants to loan money again.

2008 Oct 04 09:21 AM

[NOWHEREMAN:]

Please look at how Credit Card companies adjust their rates or How a Home Equity line rate is calculated, or a student loan, car loan, small business loan, or every conceivable type of loan.

Almost everyone of them uses Prime plus LIBOR. I the past 30 days LIBOR is up more than 50%. To offset this TAX, the Fed and only the Fed can act by reducing the Prime Rate.

IT doesn't matter whether it will help finance anything new. What matters is that the rates on everything outstanding are going to be up another 1.5%.

Think of it as if the Fed raised the interest rate level from 2% to 3.5% in one month. This is exactly what has happened. If LiBOR doesn't drop next week and the FED does nothing, the stock market will drop like a rock until the Fed does an emergency cut.

2008 Oct 05 12:40 AM