Non-Farm Payrolls Disappoint, Dollar Falls but Risk Appetite Bears the Brunt of the Pain

Jan 4, 2008 10:04 PM (DailyFX by Kathy Lien, Chief Strategist strategist@dailyfx.com --

Weak economic data should be bearish for the US dollar but unfortunately the disappointment in Non-Farm Payrolls only led to limited dollar selling. The dollar’s biggest loss was against the Japanese Yen and Euro. Interestingly enough, the dollar strengthened against high yielding currencies like the Australian and New Zealand dollars despite the bad news. The main reason is because traders believe that weak US payroll growth has broad ramifications for the global economy. If the US falls into a recession, it would be difficult for other countries to maintain their current growth rates. Furthermore, recessionary conditions in the US would deter risk appetite which is exactly why the Dow and carry trades suffered so significantly today.

Non-Farm Payrolls in the month of December shocked the financial markets by increasing only 18k, which is almost as bearish as negative job growth because the last time we saw levels worse than this was in August 2003 when the US economy shed 42k jobs. Unfortunately there is no silver lining in the report. A look into the details reveals that if the government did not increase public sector hiring, job growth would actually be negative last month. On top of that, the unemployment rate increased to a 2 year high while the annualized pace of earnings growth slowed from 3.8 to 3.7 percent. These levels indicate that the US economy is either already in a recession or headed for one. Within seconds of the data release, the US dollar fell 100 pips against the Japanese Yen as the futures market began to price in a greater chance for a 50 vs. 25bp rate cut at the end of this month. Although the Fed could cut rates by 50bp, we doubt that today’s non-farm payrolls number has cemented their decision. There are still 18 trading days until their monetary policy meeting. If oil prices break $100 a barrel and consumer prices or retail sales surprise significantly to the upside, the Fed could opt to drag out their easing cycle into the summer and lower rates at 25bp clips instead of acting more aggressively by cutting rates 50bp in January.

The Dow fell another 256 points, making this the worst first trading week of the year in over a century. The Nasdaq also fell 3.8 percent, which was the biggest one day point loss for the index since September 17, 2001, the first day it reopened for trading after 9/11. Of the 30 Dow components, only one was spared, which was Coca Cola (KO). The biggest loser was Intel Corp (INTC) which fell 8 percent. Other stocks such as IMS health, Pacific Sunware and Bed Bath and Beyond were also down because of new layoff announcements, restructuring and worse than expected earnings.

Ten year bond yields are trading lower (now 3.863 percent) on the belief that the Federal Reserve will continue to lower rates as recession fears grow.