Half a million jobs were lost in the US economy over the past 2 months, driving the unemployment rate to a 14 year high. Even though October non-farm payrolls fell short of our -300k expectation, the 240k drop and the revision from -159k to -284k for the month of September is just as pessimistic. The US labor market is in a recession and the latest numbers confirm that. However equities actually rallied on the bearish report as investors interpreted the data to mean that the Federal Reserve will cut interest rates by 50bp next month. The sell-off in the US dollar against every major currency pair except for the Japanese Yen indicates that it is the rally in equities that is driving currencies. Trading will be interesting in the week ahead with the lack of any major US economic data until Thursday. Retail sales are due for release on Friday and the expectations of a sharp decline in consumer spending could send investors back into the US dollar and Japanese Yen.
Risk of 8% Unemployment in the US
In the month of October, the unemployment rate jumped from 6.1 to 6.5 percent. Although this is the highest since 1994, it is expected to climb. Many economists have now increased their forecast for unemployment to 8 percent, which would be the highest level in a quarter of a century. The last major peak that we saw in unemployment that was higher than current levels was in 1992, when the jobless rate hit 7.8 percent. In the 1982, it was as high as 10.8 percent. Given that this downturn is widely described as the worst since the Great Depression, an 8 percent unemployment rate, which is 2 full percentage points less than the unemployment rate in 1982, would not be out of the question. Near the end of the Great Depression, the unemployment rate hit a high of 25 percent in 1933. Since the structure of the labor market has changed a lot in the past 75 years, a 25 percent unemployment rate is far-fetched, but what all of these historical instances indicate is we have yet to see the bottom in the US labor market. Finding new jobs has become extremely difficult in the current market environment, but thankfully President Elect Obama has promised to work on extending unemployment benefits to those who are out of work once he takes office on January 20th.
US Automakers Seek Government Bailout
The non-farm payrolls report and Barack Obama’s first press conference as the new President Elect would have been enough to create fireworks in the financial markets, but big news also came out of General Motors and Ford. Two of the country’s largest automakers have reported sharp losses – General Motors posted a $2.5 billion quarterly loss while Ford reported $129 million loss. Both companies have been forced to seek government aid as they are quickly running out of cash. Ford burned through $7.7 billion, leaving them with only $18.9 billion in available cash while General Motors used up $6.9 billion, leaving them with only $16.2 billion in cash. GM even declared that they would be forced bankruptcy next year if they did not receive any government intervention. Job cuts are expected at both automakers as they try to cut costs and preserve cash. GM employs approximately 263k workers while Ford employs 246k workers. If they were allowed to fail, it would lead to another half million job losses. Barack Obama’s comment today about the importance of the automakers suggests that he will back some sort of rescue package. However more bailouts using public funds will lead to more questions about how Americans will pay for it.
The Week Ahead: Federal Reserve, Retail Sales and the US Dollar
Fed funds futures are currently pricing in another half point rate cut by the Federal Reserve next month, which would take interest rates down to 0.5 percent. The two most important US economic releases next week are the trade balance and retail sales. Even if consumer spending contracts by much more than the market’s forecast, it will not force the Federal Reserve to cut by 75 instead of 50bp. Something catastrophic would need to happen for the Fed to agree to take interest rates from 1 percent down to 0.25 percent in one shot. Therefore like the non-farm payrolls report today, a weak retail sales report may not be completely negative for the US dollar. USD/JPY is moving entirely on the heels of US equities and if stocks resume their slide in the coming week in anticipation of weak consumer spending, USD/JPY, EUR/USD and GBP/USD could slip once again.