Nonfarm Payrolls Plunged But Market Rallies: What Gives?

The US unemployment rate soared to a 15 year high in the month of November as non-farm payrolls incur the steepest slide in 34 years. Although currencies and equities sold off aggressively following the release of the labor market numbers, they clawed their way back to end the US trading session in positive territory.

In the face of economic data that screams severe weakness for the US economy, the fact that currencies and equities recovered are nothing short of impressive. The counter intuitive price action in the financial markets makes us very skeptical of believing that the recovery is here to stay. There was nothing good in the jobs number and when it comes to the labor market, there is no such thing as a capitulated bottom.

The only explanation for today’s recovery in equities and currencies is the market’s increasing immunity to bad news. The 8140 level in the Dow and the 815 level in the S&P seem to be very important support levels. They have held all week and were also major points of support in October.

Non-Farm Payrolls Drop 533k, Unemployment Rate Climbs to 6.7%

Nonfarm EmploymentThe headline non-farm payrolls figure for the month of November was very weak, but the downward revisions to the October and September data made the report even weaker. The US economy lost 533k jobs last month, a number that was worse than the most pessimistic economist had estimated. The October and September numbers were both revised down by more than 100k. Instead of losing 240k jobs in October the US economy lost 320k while the September number was revised from -284k to -403k. This string of job losses is the worst since the 1981 to 1982 recession on a population adjusted basis and on an absolute basis, last month had the largest level of job losses since payrolls declined by 602k in December 1974. Anyone looking at these numbers will agree that the US labor market is in very bad shape because no industry has been spared from job losses. Although average hourly earnings increased, workweeks have been shortened. Since the beginning of the year, 1.911 million Americans have lost their jobs. Yesterday’s layoff announcements from AT&T, DuPont and Viacom suggest that major job losses will only continue.

In every recession, we have seen months where hundreds of thousands of jobs lost were followed by a month of negative non-farm payrolls in the tens of thousands of jobs. However do not mistake the inevitable slowdown in job cuts with a bottom because a bounce in past recessions tends to precede an even larger single month job loss.

The Consequences of the Abysmal NFP Number

The dollar has given back its gains as the equity market recovered, but despite the rebound in equities and high yielding currencies, there are 2 very real consequences of today’s ugly non-farm payrolls number. The first is consumer spending – the November retail sales report is due for release on Friday and major job losses will make it very difficult for consumers to spend. Even though Black Friday sales were stronger than last year, same store sales fell by the most in 39 years, confirming our belief that consumers cut back significantly last month. Next Friday’s retail sales report is also the most important piece of US economic on the calendar and we expect the number to tell us that consumer spending has contracted for the fifth consecutive month. The prospect of weak retail sales could prevent a meaningful recovery in USD/JPY. Today’s NFP number also increases the pressure on the Federal Reserve to take interest rates down to zero.

Photo: NYTimes

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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