Dollar weakness continues despite payrolls strength, but we warn of considerable euro retreat next week (more below).
The October employment payrolls delivers a rise of 166,000, well above market forecast of 83,000 and our projections of 120,000, following September’s downward revised 96,000 (from 110,000). The unemployment rate remained steady at 4.7%. The main message of the payrolls report is that immediate risks of a U.S. recession have been averted.
Despite payrolls’ strength, it is premature to rule out a December rate cut as we anticipate further key data before the Dec. 11 Federal Open Market Committee (FOMC): retail sales, industrial production and housing figures. The strength in payrolls reflects doubts due to the following:
Erosion extends in construction, retail and manufacturing jobs. Construction jobs remained in the red for the fourth straight month at -5,000 from -14,000.
Layoffs in retail employment continued with -22,000, following -13,000 and -3,000. We may see the usual November net creation of retail jobs ahead of the holiday sales season but overall weakness reflects shaky profit margins of retailers (as they cut prices aggressively ahead of holiday season). three-month average in retail is at -13,000, worst showing since June 2006.
Manufacturing worsened at -21,000 jobs, showing job losses for the 16th straight month, thus corroborating the new weakness in regional PMIs and national ISM (which hit 11-month lows).
Bulk of job creation emerged once again from government and health education with former at +36,000. Low paying jobs in hospitality/leisure created 56,000, 37,000 of which is from bars and restaurants. The creation of 20,000 temporary jobs also raises doubts regarding the duration of such employment.
Currency markets shrug the strong payrolls and send the dollar to fresh lows across the board (with the exception of the yen) as risk appetite returns briskly to the market. Nonetheless, we continue to warn ahead of renewed losses in equities next week amid reduced hopes of Fed easing despite the ongoing strains in the credit markets, potentially weak spending holiday season and the current weakness in Q3 earnings season, which to this point has delivered negative earnings compared to Q3 2006.
Risks ahead for euro bulls: Despite the current EUR/USD’s break of $1.4520 high, we detect preliminary signs of topping out, which could translate into considerable losses next week. A close below 1.4430 in EUR/USD today will likely trigger losses of as much as 300 points to $1.41 next week. Today’s weak Euro zone PMI hitting 26-month lows and reduced market’s expectations of Fed easing (with which we disagree) will also add to the euro selling. Rumors that French Pres Sarkozy may discuss strong euro with Pres Bush have yet to be checked for accuracy.
