Expert Analysis of Today's Market

Declining Job Growth Signals Fed Rate Cuts

Hans Nilsson 2007-09-07

The dollar fell against major currencies on Friday after the payroll report showed the US economy unexpectedly lost jobs in August for the first time in 4 years. The decline in job growth increased the risk of a recession and added pressure on the Federal Reserve to aggressively cut interest rates. Federal funds interest-rate futures showed traders indicated a 100% chance the Fed will lower rates to at least 5.0% at the Fed Sept. 18 meeting.

The Swiss franc and yen were particularly strong. The yen surged on unwinding of carry trades as international stock markets fell. After breaking the 115-area support, the USD/JPY is currently at the 113-handle support. If this is broken, the pair could fall to mid-August’s lows. We lowered our stop to 115.80.

Financial and Economic News and Comments

US & Canada

US non-farm payrolls fell 4K in August, the first decline since August 2003, the Labor Department said. Previous numbers were revised sharply lower. July job growth was revised down to 68K from 92K. June gains were revised to 69K from 126K. Average hourly earnings increased $0.05 or 0.3% m/m, to $17.50, 3.9% y/y, still indicating wage pressure.

A 340K decline in the size of the labor force kept the unemployment rate unchanged near 6-year lows of 4.6%. However, the unemployment rate appears moving higher. If the labor force participation rate had stayed the same as the previous month, the jobless rate would have risen to 5%. This is serious as the unemployment rate is a leading recession indicator.

Treasury Secretary Henry Paulson said the decline in US payrolls in August was “not totally surprising” and expressed confidence that the US economy will still expand in the second half of the year.

Canada’s employment rose a stronger-than-forecast 23,300 in August, Statistics Canada said. The unemployment rate held at a 33-year low of 6.0%.

Europe

Sweden’s Riksbank raised its benchmark interest rate to a 4-year high to contain inflation, adding that the financial market turmoil will prevent it from picking up the pace of rate increases.

German imports fell 2.4% m/m and exports fell 0.1% m/m in July, indicating slowing growth.

Asia-Pacific

Japan’s leading economic index signaled the Japanese economy will rebound from an expected Q2 contraction. The LEI rose to 70 in July, the Cabinet Office said. A reading of 50 or more indicates the economy may expand in 3-6 months. The coincident index was 66.7, its fourth month above 50.

FX Strategy Update

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