Concerns about the US economy are growing as the Dow Jones Industrial Average erases all of its year to date gains, taking the US dollar down with it. The rally that we have seen in the first few days of trading will be difficult to sustain with all of the weak economic data that we expect in this month. Although the US government has thrown a lot of monetary and fiscal stimulus at the US economy, we may not see the fruits of their labor until the second quarter at the earliest. There is a major risk of a sharp drop in this month’s non-farm payrolls, retail sales and fourth quarter GDP reports and only after we have seen the last of depression like numbers can we begin to see a meaningful recovery in the US dollar.
ADP Signals Big Trouble for NFP
This is a big week in the currency market with non-farm payrolls due for release on Friday. The leading indicators for the pivotal labor market report are coming in and the latest report suggests that in the last 2 months of the year, more than 1 million Americans may have lost their jobs. According to the ADP private sector employment report, 693k jobs were lost in the private sector last month. This was much weaker than the market’s -493k forecast and suggests that non-farm payrolls could have dropped by more than 600k in the month of December. Layoffs also rose 274.5 percent according to the Challenger report with the biggest declines seen in the financial sector. Unfortunately big job losses will probably continue with Alcoa and Intel announcing more layoffs. The only silver lining is the rebound in the employment component of the service sector ISM report, which tends to have a very strong correlation with the non-farm payrolls report. With that in mind, we believe that job losses last month will be closer to 500k than 700k. Either way, both numbers spell big trouble for the US labor market. Q4 will be one of the worst quarters for non-farm payrolls that this generation has ever seen which is why the US dollar is weak and may remain weak going into the NFP report.
Forecasts for GDP, Unemployment and Deficit
Adding pressure to the dollar today were the forecasts for GDP and the budget deficit from the Chamber of Commerce and the Congressional Budget Office (CBO). Last week we warned that fourth quarter GDP could be very weak given the sharp decline in the retail sales and the increase in the trade deficit. The Chamber of Commerce predicts that GDP could fall by as much as 5 percent in the last quarter of 2008 and by another 3 percent in the first quarter of 2009. They also expect the unemployment rate to top 8.5 percent.
We also believe that GDP will confirm the recessionary conditions in the US economy and that unemployment will rise sharply, which is why non-farm payrolls may only compound the problems that the US dollar faces this month. As for the budget, the CBO expects the deficit to hit $1.186 trillion this fiscal year. For sovereign wealth funds in particular, the deteriorating US balance sheet will be another reason why a run on the dollar remains a risk in 2009.