US Payrolls Will Force Fed to Keep Pace with ECB

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The sharp sell-off in USD/JPY tells us FX traders were disappointed by this morning’s non-farm payrolls report and they won’t be the only ones because today’s jobs number spells big trouble for the Federal Reserve and for President Obama. The magic number today was 100k and unfortunately American companies added only 80k jobs in June. After the small upward revision to the May report, non-farm payrolls were virtually unchanged. Federal Reserve officials hoped that today’s jobs number would allow them to coast on the monetary easing of other central banks and spare them from QE3. Unfortunately this won’t be the case. Even though job growth accelerated, the sluggish pace of improvement in the labor market means that the Fed will need to keep up with the ECB and BoE in August. In other words, get ready for a third round of Quantitative Easing because it is hard to argue that 3 months of weak job growth isn’t a trend. After the move from other central banks this week, QE3 won’t be as politically controversial. For President Obama, the lack of improvement in the unemployment rate means a tougher battle for reelection in November. The biggest problem in the U.S. economy is the lack of job growth and while the unemployment rate in the U.S. has fallen from its high of 10% it has refused to break below 8%.

The details of the report show non-farm payrolls revised slightly higher in May from 69k to 77k and private sector payroll growth slowing to 84k from 105k the previous month. The unemployment rate remained unchanged at 8.2 percent but the U-6 unemployment rate increased to 14.9 from 14.8%. The only good news was average hourly earnings, which increased to 0.3 from 0.2 percent and average weekly hours, which rose to 34.5 from 34.4.

While the U.S. dollar weakened against the Japanese Yen, it soared against the euro, British pound and other high beta currencies. Investors are clearly interpreting today’s NFP report to be negative risk. The main takeaway from this week’s monetary policy meetings and economic data is that global growth will remain very weak in the third and fourth quarters. When the Federal Reserve last met, Bernanke pledged to provide additional stimulus if the U.S. economy slowed further and come August, they will be looking for the Bernanke to deliver on this pledge.

We expect for further losses in USD/JPY but additional EUR/USD weakness week will hinge upon the moves in Spanish bond yields and on the aggressiveness of the ECB vs. the Federal Reserve.

Meanwhile Canada also released employment numbers this morning and like the U.S. NFP report, job growth remained virtually unchanged. A total of 7.3k Canadians found new work last month, which helped to drive the unemployment rate down to 7.2 from 7.3 percent. What made the Canadian report slightly better than the U.S. report was the change in labor market dynamics. The details of the report showed an increase of 29.3k in full time employment and a decrease of 22k in part time employment.

Kathy Lien
Managing Director

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