Euro Slips on Weaker Economic Data (page 1 of 2)

DailyFX Fundamentals 04-03-08

By Kathy Lien, Chief Strategist of DailyFX.com

Could March Non-Farm Payrolls Rebound?

The US dollar has staged a modest recovery over the past week on the relief that there have been no new blowups in the US financial sector. Stocks have rebounded and gold prices have dropped, which confirm that risk aversion is subsiding. However whether risk appetite continues to improve will be largely dependent upon the level of non-farm payrolls in the month of March. Of the 10 leading indicators for non-farm payrolls that we typically follow, nearly all of the indicators point to another month of negative job growth, but only half of those indicators signals that the number of job losses in March will be greater than the -63k job loss reported in February. More specifically, jobless claims are on the rise, consumer confidence hit a 4 year low, Challenger Gray and Christmas announced a 9.4 percent increase in planned layoffs by US firms and strike activity cut 1100 jobs from US payrolls. On the other side of the spectrum, we had the rebound in ADP, the improvement in the employment component of manufacturing ISM (although it is still contractionary) and an increase in online job ads. The employment component of service sector ISM is usually a very reliable leading indicator for NFPs, but it held steady last month which makes NFPs a particularly difficult call. March non-farm payrolls could very well rebound, but we still expect the labor market to deteriorate further in the coming months. Over the past 3 decades, the US economy has gone through 3 recessions. In each of those 3 recessions, there was a string of job losses that lasted for a minimum of 10 months. Many people argue that the current downturn in growth could be more severe than the recession in the early 2000s due to the triple blow of a housing crisis, credit crunch and skyrocketing commodity prices. If this is true, we will see far more than 3 consecutive months of job losses. Also expect the level of job losses to climb because in each of the past 3 recessions, the largest single month job loss was more than 300k! In this context, a 100k drop over the next few months is not only realistic but practically guaranteed. The bankruptcies of ATA Airlines, which was once the nation's 10th largest airliner and Aloha Airlines should lead to another 4000 layoffs. Although no other carriers face the risk of Chapter 11 bankruptcy, the troubles at ATA and Aloha highlight the strain that high oil prices are having on the entire airline industry. On the eve of March non-farm payrolls, these layoffs confirm that difficult times lie ahead for the US economy.

Euro Slips on Weaker Economic Data

Incoming economic data suggests that the Eurozone
is no longer immune to the affects of slower US growth. Retail sales for the region as a whole dropped 0.5 percent in February while service sector PMI was revised down modestly. Although we are beginning to see cracks in the Eurozone economy, they pale in comparison to the problems in the US economy. However the ECB may soon find themselves behind the curve. In January, we had indicated that the dollar could bottom in the second half of the year. Although that is now more likely to happen in the fourth quarter, one of the main things that we were looking for to trigger a turn in the greenback was a slowdown in the Eurozone economy. If the ECB begins cutting interest rates at a time when the Fed has already taken interest rates down to as low as they can possibly go given inflationary conditions, the twist of fate may actually carve out a long term bottom in the US dollar.