Friday, August 6, 2010

Thoughts on NFP and they are not good.

Well that sucked.

NFP came in at -131K, way below forecasts of -65K.
Private sector payrolls gained a disappointing 71K, below forecasts for a gain of 91K.
June figures were also revised lower.
The work week increased and hourly earnings ticked up.
Manufacturing, education and health services grew jobs.
The service sector lost jobs for the second consecutive month and construction lost jobs.
State and local governments lost 48K jobs, while federal government jobs (census) lost 154K.
The unemployment rate drops once again to 9.5% as even more people drop out of the labor force.

The June Jobs report is revised majorly downward to -221K, from -125K. This is alarming for the economy at whole but great for Wall Street because.....

.....The downward revisions will most likely embolden the Fed to renew asset purchases. This is why I am thinking that the market actually rallied on the opening today. Its preposterous but again it is what it is.

Please go back to my piece about stimulus and liquidity.

Bonds have rallied feverishly and yields are dropping by the second. The US 2Y yield is at record lows. The dollar of course is getting crushed as the Euro went vertical after the NFP report. More stimulus is pressuring the USD and rallying the treasury market. When the dollar gets sold it creates liquidity via the carry trade. This is then used to buy risk assets.

There was one truly stunning figure in the NFP.
Those working actually declined by 159K to 138.960M even as another 38K left the labor force between June and July, resulting in an actual drop in the unemployment rate from 9.6% to 9.5%.

I can't say it any better than this. This report is a total disaster for the real economy. What is says for the financial economy is that another round of major stimulus is absolutely inevitable.

You have to watch the US Dollar here. The Euro is on a tear. You would think this trade needs to take a breather. If both the USD and EURO turn, global markets are in for some serious trouble as liquidity will dry up once the USD heads higher.

More depressing facts:

• U-6, or real unemployment rate, was flat at 16.5% even with gains in private payrolls.
• The average duration of unemployment is now 34.2 weeks, Median 22.2
• 44.9% have been out of a job for longer than 27 weeks.
• Birth/death adjustment just 7K, compared to 147K in June.

I will just say this. This is a horrible report and what we are seeing at the moment just leads me to believe that a major shift out of risk assets is under way. No matter what the Fed says on Tuesday, the Fed can't create jobs or get the labor market back in gear. The real economy is broken. The Fed can only print more money to take care of the financial economy, and it will do that.

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