Payroll Numbers In Line, Dollar Lower on ECB Position

by: Kathy Lien posted on: July 03, 2008 | about stocks: UDN / UUP    
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The jobs number for the month of June was bad but not bad enough to stifle the gains in the US dollar. Non-farm payrolls fell by 62k, the sixth consecutive decline in a row. The April number also was revised down from -49k to -62k while the unemployment rate remained at 5.5%, matching the highest level since October 2004.

Anything short of 100k would have been dollar positive and that is exactly how the market reacted today. The biggest contributors were healthcare, education, leisure and government. The biggest losers were in goods producing and business services.

The importance of the NFP number depends upon how it impacts the Fed’s monetary policy decisions and Thursday’s drop in jobs will not hold them back from raising interest rates in the third or fourth quarter. But the Fed needs to be very careful because jobless claims this week broke the 400k level. They came in at 404k this week, just shy of the 3/28 levels, which was the highest in 2.5 years. The labor market will get worst, but probably not as quickly as inflationary conditions, which is why the Fed will barely bat an eye at today’s NFP numbers.

As for the ECB, so far, Trichet is moderate. After raising interest rates by 25bp Thursday morning, he continues to harp on the risk of further upside inflationary pressures but at the same time he remains concerned about growth. Further rate hikes seems to be on the tip of his tongue, but Trichet does not want to spook the markets right now which is why he is simply leaving the door open for another rate hike this year. This is of course a disappointment to Euro bulls especially since Trichet said that he has “no bias.”

The Euro has weakened against the US dollar post NFP and ECB, but the knee jerk sell-off may be a tad overdone. Euro weakness should be limited because the market still expects 3 rate hikes from the ECB over the next 12 months.

This article has 5 comments! Add yours below...

Kathy Lien

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This article has 5 comments:

  •  
    Dean
    Plassaras
    Jul 03 10:44 AM
    I am having a bit of difficulty understanding Euro's weakness following the ECB's rate hike. I would expect that such move will strengthen the currency.
  •  
    Dean
    Plassaras
    Jul 03 10:45 AM
    I am having a bit of difficulty understanding Euro's weakness following the ECB's rate hike. I would expect that such move will strengthen the currency.
  •  
    Dean
    Plassaras
    Jul 03 10:45 AM
    I am having a bit of difficulty understanding Euro's weakness following the ECB's rate hike. I would expect that such move will strengthen the currency.
  •  
    Coelacanth
    Jul 03 12:18 PM
    Dean,

    Three posts...all the same. Hmmm.....

    The reason the euro tanked against the dollar is a lot of traders (including some "experts" on Bloomberg) were looking for more hawkish language from Trichet after the decision. To their surprise there was no language about "heightened alertness" or "strong vigilance".

    Traders came away feeling the ECB is back to a neutral stance for now and subsequently ran for the exits. The OP (Kathy) knows this but often, if not most times, the statement accompanying the rate decision is more important than the actual decision. Markets look forward.

  •  
    Dean
    Plassaras
    Jul 04 04:19 PM
    Coelacanth, thanks for the explanation. I hope this reply does not get posted three times (I am not sure what happened with the multiple posts).
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