US Payrolls Jump Up Thanks in Part to "Ghost Jobs"

The US payroll numbers came in much better than expected on Friday, helping the dollar continue its rebound versus most of the currencies. American employers added 244,000 jobs in April according to the Labor Department, exceeding last month’s revised 221,000 jobs and easily beating economists’ projections. But a separate report showed that the jobless rate climbed to 9% – the first increase since November of last year. Chuck was scratching his head after the release of the jobs data on Friday morning, and sent me this to include in this morning’s Pfennig:

Well… Brother, was I wrong about the jobs report last Friday! But in my defense, all the signs pointed to a weak number. Don’t know why I didn’t take into consideration the ghost jobs, but I didn’t. Of the 244,000 reported, the BLS added 175,000 jobs through their hedonic adjustment birth/death model. I’ve explained this many times in the past, but, in essence, these are jobs that are added out of thin air, much like our money supply.

Thanks to Chuck for shedding a bit of light on what he believes is behind the surprise increase in the US jobs numbers. Another report released Friday showed that US consumer credit increased, but March’s $6.016 billion jump was slightly less than February’s increase of 7.553 billion. US consumers are definitely starting to borrow again, and the “officials” are pointing to this increase in debt as a good sign that the US economy is recovering. I even read a couple of news stories that equated the jump in payrolls with the increase in consumer debt (I guess the “Ghosts” have credit cards!!). These guys just don’t get it. They really believe that debt is good, and get excited when US consumers are going deeper in debt, as it means they are spending more. But perhaps US consumers are going deeper in debt because they can’t afford to pay cash for a $100 tank of gas. The increase in US consumer credit is not, in my opinion a good sign for the long-term recovery of the US economy.

This week is a light one as far as US data. We don’t have any data releases today, and just wholesale inventories tomorrow. Wednesday will bring the trade data for the month of March and on Thursday we get the weekly jobs data along with the retail sales numbers. The end of the week will also give us Washington’s view on prices with the PPI data for April released on Thursday followed by the Consumer Price data on Friday. As Chuck has pointed out in the Pfennig for years, the inflation data is even more manipulated than the employment data, so these “official” numbers don’t carry much credibility on the desk; but the markets do watch them, so we have to also.

The euro (EUR) was hit hard last week, dropping over 3.5% versus the US dollar. And on Friday it continued to slide, dropping the most in a year against the dollar, on speculation that Greece would be forced to exit the common currency. Der Spiegel magazine broke the story that the European Commission had called a meeting to discuss the situation. But Pfennig readers shouldn’t have been surprised by this news, as Chuck has been talking about this possibility for months. Leaving the euro would give weaker members like Greece or Portugal just what they think they need, the ability to devalue their currencies in order to deal with their debt. Exiting the euro would give them the opportunity to turn up the printing presses, and create more currency to pay down their debt. (This is exactly how the US is dealing with our huge debt levels.)

We have been expecting the sovereign debt crisis to raise its head again, and the story of the clandestine meetings certainly gets the conspiracy theories going. The euro had been getting a bit too strong, and the news on Friday certainly took a bit of the shine off the common currency.

However, Greece rejected the report, and the euro has recovered in early European trading. The meeting Der Spiegel exposed did take place, but Greece is not dropping the euro (yet), and this morning’s stories report about an apparent agreement on another restructuring of the Greek bailout plan. The euro has moved higher on this news, and was helped by data released Friday and this morning which showed that Germany’s economy continues to recover at a faster pace than economists had predicted. Reports on Friday showed that German industrial output rose for a third month in March, increasing 0.7% from the previous month. And data released this morning showed that German exports surged last month to the highest monthly total ever recorded. Exports jumped 7.3% from February, making a mockery of economists’ predictions of a 1.1% increase. The German economy is definitely powering the European economic recovery, and the higher value of the euro apparently isn’t having much of an impact on the recovery. Traders have stopped selling the euro on this better-than-expected data, and the 1.43 handle is looking like a bottom.

The two best performing currencies versus the US dollar over the weekend have been the Nordic currencies of Sweden (SEK) and Norway (NOK). Both currencies climbed just under 1% versus the US dollar in the past day, reversing a five-day slide. The Swedish economy is dependent on manufacturing, so the good news on German exports also probably boosted interest in the krona. Heavy machinery exports to Asia, where the economies continue to grow, have helped stabilize the Swedish economy, and expectations on interest rates are also in favor of the Swedish krona. Norway’s economy continues to be one of the strongest in the world, and oil prices hovering around $100 have certainly helped. The Norwegian krone is one of the favorite currencies on the desk. While neither currency is considered a “high yielder,” both central banks are getting aggressive battling inflation, and interest rates will definitely go higher this year. Either would be a good alternative to investors looking to shed the volatility of the euro.

Commodity prices finally stabilized on Friday, and both gold and silver have actually rallied a bit. Gold moved back above $1,500 this morning, and silver was up over 3% on Friday. But the metals were still down on the week, with silver dropping a whopping 18.65% last week. But this latest little rally sure looks like a dead cat bounce, and the apparent “bubble” which had been inflated in silver looks like it has a bit more air left in it. Chuck let the desk know that one of his chartist friends believes silver will rally a bit before dropping further to $27. From there, silver is projected to shoot back up, and personally I am going to start buying back into silver if/when it gets below $30.

The end of the free fall for commodities helped to stabilize the commodity currencies of Aussie (AUD), New Zealand (NZD), and Canadian dollars (CAD) along with the South African rand (ZAR). The Australian dollar rose before a Chinese report tomorrow, which is predicted to show that Chinese imports rose in April. China is the largest importer of Australian raw materials, so good news for China is also good news for the Aussie dollar. Reserve Bank of Australia Governor Glenn Stevens is a favorite of the desk, and continues to keep a lid on Australian inflation. Stevens held interest rates steady on May 3, but policymakers said they will likely need to raise interest rates “at some point” to keep inflation from accelerating. Australian Treasurer Wayne Swan is set to deliver the budget to parliament tomorrow, but he indicated yesterday that the government’s deficit would widen this year and next before moving back over to a surplus in 2012-2013. Rising interest rates, continued growth in China, and a projected budget surplus in the next three years should continue to keep the Australian dollar as one of the best-performing currencies versus the US dollar.

US Treasury Secretary Geithner will be a busy man the next two days, as Washington hosts the annual Strategic and Economic Dialogue. Secretary Geithner is expected to push China to raise interest rates in order to help boost the renminbi versus the US dollar. Geithner will be pushing China to relax controls on their financial system and give foreign banks and insurers more access according to officials at the Treasury department. The Chinese renminbi has been pegged a bit higher today, in preparation for the meetings. China traditionally lets the renminbi appreciate slightly before and after meeting with US officials. But China’s currency won’t be the only topic discussed. China’s Vice Finance Minister Zhu Guangyao raised concerns with the overall level of debt in the US. China is the biggest foreign holder of US Treasury notes, so their concerns over our ability to pay this debt back are definitely warranted. “We are paying close attention to the domestic discussion in the US on debt and deficits,” Zhu told reporters in Beijing today. “We hope the US can take effective measures toward fiscal reorganization just as President Obama suggested.”

The key word in that statement is “EFFECTIVE.” While both parties have proposed cuts in spending, these cuts will need to be much deeper in order to be effective. As Chuck likes to say during his presentations, the spending cuts which have been proposed by both parties when added together still don’t amount to much more than a bucket of sand on the beach. China continues, for now, to finance our debts and deficits, but unless they are stupid (and I don’t think they are) they will become more aggressive in their plans to diversify out of their US Treasury holdings. This isn’t good news for the long-term prospects of the US dollar.

To recap: Ghost jobs helped boost the monthly jobs data here in the US, but the overall rate ticks back up to 9%. Greece was rumored to be leaving the euro, but good data from Germany along with another change to the Greek bailout package stopped the euro’s slide. The Nordic currencies were the best performers over the past 24 hours, with both the NOK and SEK rallying 1% versus the US dollar. Silver finally ended its freefall, but could this just be a dead cat bounce? And US Treasury Secretary Geithner will be pushing China to raise interest rates as a way of strengthening the renminbi.

Chris Gaffney
for The Daily Reckoning