FYI | Sep 10 2007
By Greg Peel
The market had been anticipating the August non-farm payroll numbers all week. Expectation was for an increase in jobs of 110,000. But given data flowing in the week had leant more to the positive side, there was also anticipation of perhaps a healthier figure.
The question was then, how to respond? A number above 110,000 would mean less chance of a recession, but may put a Fed rate cut in jeopardy. A sub-100,000 rise might seem a bit more concerning, but would it at least force the rate cut? Maybe something a bit below expectation would be worth feeling bullish about on that basis.
When the number came out as a fall of 4,000 jobs, the market was shocked. Whichever way you look at it, it was very bad. This was the first job decrease since August 2003. The June and July figures were also revised downward.
The Dow closed the session down 250 points or 1.9%, almost at its lows for the day. It was a steady slump. The S&P fell 1.7% and the Nasdaq 1.9%.
The talk is now of a possible 50 basis point rate cut on September 18, instead of the 25 points largely assumed up to now. However, there are still those in the market suggesting the Fed may still not cut rates at all. Philadelphia Fed president Charles Plosser fuelled uncertainty by suggesting on Saturday:
“I believe disruptions in financial markets can be addressed using the tools available to the Fed without necessarily having to make a shift in the overall direction of monetary policy,”
Having assessed the beige book this week, the Fed noted that only the housing and mortgage industries were weak, while the rest of the economy was doing just fine. Will the jobs number make the difference? And how is the Fed going to relieve the still frozen credit market? This will be one of the most anticipated FOMC meetings in history.
Adding to the woes on Friday was news that America’s leading mortgage lender and benchmark for the current crisis – Countrywide – was looking to axe 12,000 jobs. That’s a full 20% of its workforce. Countrywide is anticipating a reduction of 25% in new mortgages in 2008. The only saviour may be a decent rate cut, it says. Is this just a ploy? Countrywide’s CEO has already been on television suggesting a recession is imminent. He is effectively pleading for the cut.
Once again there was a flight to safety on Friday, in the form of ten-year bonds. The yield fell from 4.51% to 4.37%. But this provided no support from a US dollar hit by recession fears. The greenback fell 0.5% against the euro and 0.3% against the pound. More importantly, it fell 1.7% against the risk benchmark yen – at 113.48 the lowest level in a month.
The Aussie, however, has found its level – at least for the moment. Until this week a rising yen implied carry trade unwinding and thus a lower Aussie. While the carry trade is no doubt under pressure once more, the US dollar’s fall has usurped the equation. With all Australia’s economic signals fiercely positive, the Aussie finished higher on Friday at US$0.8303.
And gold rose US$5.40 to US$700.10/oz. This is significant for three reasons: (1) Spot gold has now closed above the magical US$700/oz mark, albeit only just. According to the chartists, the next stop is US$730/oz. (2) Gold rose despite the fall in the Dow, bucking the liquidation trend of previous sharp falls in the stock market. (3) There was little sign of central bank selling, from either the Europeans or as clandestine attempts by the US Treasury to halt the dollar’s slide.
Is gold now free to rise unencumbered?
Base metals initially fell in London, on fears a US recession would affect a reduction in demand. However, as the US dollar slid the metals recovered somewhat (being, as they are, denominated in US dollars). The oil price rose yet again – to US$76.70/bbl – on ongoing hurricane, supply and terrorism concerns.
The SPI Overnight fell 100 points.
Tuesday is the six year anniversary of 9/11. Osama Bin Laden has made his first video speech in some time. Is this a coded signal?
