Will Non-Farm Payrolls Push the Fed to Cut Interest Rates?
September non-farm payrolls are due for release on Friday and now more than ever the level of job losses could determine whether the Federal Reserve will cut interest rates this month and by how much. The US dollar hit a one year high against the Euro this morning, but has remained weak against the Japanese Yen. This divergent price behavior has been primarily due to the market’s adjustment of ECB interest rate expectations. However should non-farm payrolls be particularly bad, it would suggest that the Fed could cut interest rates and cut them aggressively, triggering a turn in the EUR/USD that would make its price action more in line with the sell-off in USD/JPY.
Job Losses to Continue for Ninth Straight Month, NFPs Should Fall by More than 100k
For the first time in this cycle, the market is looking for non-farm payrolls to fall by more than 100k. This would mark the ninth consecutive month of job losses but it would not be the first time that non-farm payrolls have actually dropped by the psychologically hobbling 100k amount. In fact, we believe that non-farm payrolls could fall as much as 130 to 150k and even if it falls short of our forecasts, the market’s price action reflects their expectations and everyone still expects the labor market to worsen. The 4 week average of jobless claims and continuing claims remain at 5 year highs. Claims are usually not subject to significant revision and are therefore very reliable leading indicators for NFP. Also, we have not heard the last of the layoff announcements. With market caps taking a bit hit and lending difficult to attain, US companies are tightening their belts and cutting back.
Of the 76 economists surveyed by Bloomberg, the most optimistic forecast is by Morgan Keegan & Company who calls for only a 13k drop in non-farm payrolls and the most pessimistic is Deutsche Bank who is calling for a 175k drop. Even though the US economy is not in an official recession, many people argue that the current problems are unprecedented. Therefore it is worthwhile to take a look at how bad things got for the labor market in prior recessions. Over the past 30 years, there have been 3 recessions and in each of those recessions, we have seen at least 11 consecutive months of job losses with at least one month where non-farm payrolls fell more than 300k. If this downturn is much worse than what we have seen since the Great Depression, we would not only expect job losses to continue into the end of the year but for the losses to grow.
However as pessimistic as we are, it is important to point out there are arguments for an improvement in non-farm payrolls: