Today’s employment report is a resounding alert that recession may already be here, as it shows the rare combination of a bigger than expected increase in the unemployment rate (two-year high of 5.1%), and eroding job creation (lowest in four years at +18,000). Average hourly earnings slowed to 0.4% from 0.5%. The report means a sharply negative opening in U.S. stocks, which would extend the sell-off in yen crosses.
The gloomy report is in line with the December ISM report, which fell below 50, registering broad declines in new orders and production.
The most resounding sign of weakness in this report is the 24,000 loss in retail jobs in December, a month otherwise characterized by strong holiday shopping hiring. This suggests that retailers’ aggressive discounting to stay afloat have reached to their profit margins to the extent of cutting the workforce.
The 31,000 rise in government jobs prevented the payrolls figure from dipping into negative territory. We will see more signs of government intervention President Bush’s 1 pm press conference.
The intensification of layoffs in construction to -49,000 shows the sixth straight monthly declines, producing a total of 194,000 losses over the past 12 months.
Despite the sharp sell-off in equity futures, we’re not seeing a considerable unwinding of carry trades or an equally considerable decline in the dollar as traders hesitate to extend risk reduction trades ahead of the president’s conference, which has the potential of reversing negative sentiment. Recall that the last Bush conference was on Dec. 6, one day before the release of the November payrolls report, announcing the plan on freezing rate resets on subprime mortgages.
The report cements a rate cut later this month, but may not necessarily guarantee a 50-basis point cut. Nonetheless, we do not rule out the possibility of a rate cut prior to the Jan. 30 meeting because the current liquidity injections are addressed at liquidity rather than macroeconomic stability. We stick with our forecast for 100-bp rate cuts in 2008 to 3.25%. .
We continue to view GBP to be increasingly vulnerable to fresh selling, especially following brief post-payrolls gains vs. USD. NZD and AUD appear negative against USD, eyeing 0.7670 and 0.8770. USD/JPY eyes support at 107.50, but we warn of a rebound to as high as 108.95 and 109.40.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
a.laidi@cmcmarkets.com
