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U.S. Employment Data - 4/4/2008 8:30am EST
[B][U]Analysis[/U][/B] Non farm payrolls are expected to drop 50k while the unemployment rate is expected to rise from 4.8% to 5.0%. While last month’s report showed a loss of 63k jobs the unemployment rate actually fell due to job seekers leaving the labor market. In a survey by Bloomberg.com, economist forecast for NFP were in a range of -150k to 65k. The range in the unemployment rate forecasts was 4.7% to 5.1%. The wide range supports the view that the data remains relatively uncertain. Although the ADP Nonfarm Employment Change showed an addition of 8k jobs, the sentiment surrounding this report is for a weak jobs report. The accuracy of the ADP report is in question as it has overestimated actual NFP data for the past six months. Continuing weakness in consumer sentiment and consumer confidence suggests downside risk. Additionally, the American Axle strike has idled more than 40k workers which impacted the intitial claims data which came in above 400k to its highest levels since September 2005. The private sector along with manufacturing and construction is projected to show the steepest declines in job losses. Over the last three recessions the job market shrank for a minimum of 11 months and as much as 17 straight months. A negative read will mark only the third consecutive month. The combination of the housing crisis, credit crunch, and rising commodity prices is suggesting this recession could be more severe than any in recent history. Furthermore, historical data presents a strong case for a NFP reading of well over -100k in the very near term. It was only a few months ago when market sentiment was that the labor market was supporting the economy. The sharp downturn in jobs data is hinting that this may no longer be the case. During his testimony earlier this week in front of Congress, Fed Chairman Ben Bernanke basically stated that we are entering into a recession when he said, “it now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.'' He also said that unemployment should move higher in line with recent data showing a softer labor market. These comments suggest that a bottom in the U.S. dollar may be ahead of us. That leaves Treasury Secretary Paulson, the White House, and not many others forecasting the U.S. economy to avoid a technical recession. It should be considered that the recent jobless claims will not be reflected in this report but may show up in either the revisions or the April report. Therefore a rebound is not completely out of the question. The employment component of the manufacturing and the non-manufacturing ISM data held steady. Another argument for a positive read, besides the ADP report, is increased online ads at Monster.com. While not convincing, it must be considered. Arguments for a weaker NFP report is an increase in planned layoffs by corporations, increasing jobless and continuing claims, consumer confidence at 6 year lows, and as stated earlier, strike activity which increased by 1100. With regards to interest rates, a lower than expected report may trigger the market to start pricing in a 50 basis point rate reduction when the Fed announces again April 30th. As of right now investors have priced in a 25 basis point rate cut and are reluctant to expect interest rates to dip below 2%. Interest rates are at 2.25%. This could add to the downside risk to the dollar as it will be vulnerable to a sell off if the number should miss the already low forecast of -50k. As always, revisions will play a major role in market volatility and should be monitored closely. [B][U]Trade Analysis [/U][/B] Since the markets are hungry for any data in support of the view that the economy will in fact avoid a recession the dollar has some potential for a rally on any good news especially the all powerful employment data. With that said, expectations remain for lower interest rates as well as a softer labor market which may bring heavy selling pressure to any rally in the dollar. Profit potential in this economic event is in a weakening U.S. dollar after a weaker than expected employment report. Caution is advised as a negative reading may already be priced into the event. The extent of any sell off in the case of a weak number will rely on the deviation from the expected NFP of 50k and rate of 5.0%