Non-Farm Payrolls Kills the Dollar

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There was something for everyone in today’s non-farm payrolls report, but the main takeaway is that job growth slowed materially in the month of August and for the Federal Reserve, this means that easier monetary policy is absolutely necessary. The dollar sold off aggressively in the wake of the report as traders re-price the possibility of QE3. Non-farm payrolls rose a mere 96k last month compared to a rise of 141k the prior month. Economists were looking for job growth to slow but not nearly as much as it did especially considering Thursday’s better than expected economic data. Job growth was also revised lower in June and July, highlighting the overall weakness in the labor market. While the improvement in the unemployment rate is encouraging it was largely caused by a drop in the participation rate. Although private sector payrolls was slightly better, the first month of job losses in the manufacturing sector in nearly a year gives the Fed reason to be very worried about the labor market.

Setting monetary policy will be made easier by today’s non-farm payrolls report because the rise in July proved to be nothing more than a one month blip. Job growth is very weak and if Fed officials had considered easing in early August, the latest NFP report has only increased their urgency. The only question is the form of easing that the Federal Reserve will choose. One option is of course a third round of Quantitative Easing and the other option is to change the extended period language in the FOMC statement and possibly tie it to a piece of economic data. The odds of QE3 have certainly increased with today’s number and we put the odds at 75% for next week. The only reason why the Fed may want to wait is to buy themselves some additional time by setting the stage for QE3 this month and making the official announcement in October. Either way, more stimulus is on the way and for this reason the dollar has sold off aggressively.

Up North, Canadian labor market conditions improved dramatically last month with the economy adding 34.3K jobs. While this report is very encouraging, we have to point out that all of the job growth was in part time and not full time work. The IVEY PMI index is scheduled for release at 10:00 AM ET and slower manufacturing activity is expected for the month of August after a sharp rise in July.

There’s an overall sense of optimism in the financial markets today as investors view the new stimulus programs announced by the European Central Bank and the People’s Bank of China as a game changer for the markets. While we viewed the ECB’s announcement with skepticism, the sharp decline in Spanish and Italian 10 year bond yields indicate that the central bank has achieved their goal (at least in the near term) of effectively convincing investors to buy the bonds of heavily indebted Eurozone countries. The Chinese government continues to take an active interest in preventing their soft landing from turning into a hard one. Last night, they announced a plans to inject $100 billion of new stimulus into the economy through infrastructure projects which is an effective way to revive economic activity from the ground up. Together, these 2 announcements have had a major impact on risk appetite and if the Federal Reserve eases next week as well, the flood of stimulus could potentially lead to a permanent shift in sentiment.

Kathy Lien
Managing Director

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