The August payrolls report showed a net loss of 4,000 jobs, the first net decline since August 2003, a time when the deflation-fighting Federal Reserve was in the midst of an easing cycle. The unemployment rate was steady at 4.6%, while average hourly earnings rose 0.3%.
There is no silver lining in the sectoral breakdown of the payrolls situation. Manufacturing employment lost 46,000, making this the 14th consecutive monthly decline in the sector. Construction lost 22,000 jobs, dragging the three-month moving average to -10,000. Retail added 12,000 jobs after 5,000 in July, with the three-month average down to 2,000. Education employment added 63,000 jobs, which may have resulted from back to school hiring. Even total government/Federal jobs were cut, as payrolls fell 28,000, showing the third monthly net loss in total government jobs, a pattern not seen since autumn 2000 – a period of recession.
Macro concerns take over, dollar damaged, gold shines
Today’s report confirms our assessment that the macro economic concerns of the U.S. economy will gradually take over from the current market turbulence, driving the Federal Reserve to cut the funds rate with less reluctance by 50 bps this year. Consequently, the broad damage to the U.S. dollar risks retesting the 80 level in the U.S. dollar index as the Fed will be forces to cut rates to at least 4.75% this year and by another 50 bps the next year. Our calls throughout past months for $700 target by end of Q3 will likely be realized today in the event of a NFP below 100,000, and/or an unemployment rate of at least 4.7%. Technicals in gold suggest the rally can extend to $730 within two weeks before the next round of unwinding of carry trades is likely to drive down the metal back towards the $670s.
Greenspan’s 1998-2007 comparison is flawed
We strongly disagree with former Fed Chairman Greenspan’s comments indicating the similarity between the current market turmoil with the 1998 LTCM crisis as “identical” mainly because of the far weaker economic growth prevailing today than in 1998 as well as the risks for further weakness to come, which could exasperate the current meltdown. In 1998, the U.S. economy grew 4.7% in Q2 and 6.2% in Q3, while the Fed’s emergency rate cuts were directed only at shoring up dried up liquidity caused by a handful of banks. Today’s U.S. economy is growing at a subpar pace of 2.0% with housing and manufacturing recessions threatening to disrupt an increasingly fragile consumer fabric especially with oil prices 320% higher and gasoline prices 200% higher than in 1998. With the year on year monthly trend of existing home sales falling for a straight 20 months, down more than 20%.
Further confirming the economic contrasts between 1998 and 2007, the lowest monthly payroll registered in 1998 was an increase of 121,000 while the highest was 401,000. In 2007, the lowest monthly payroll increase was 68,000 while the highest was 175,000.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
