Jobs Fall 80,000!

Good day… And a Marvelous Monday to you! Finally… Some decent weather here in the Mid-West. I was able to be outside all weekend! Great stuff… Sun, warmer weather, the Cardinals on the radio, resting my leg.

Well… When I left you on Friday, I said, “Let’s try to make it a Fantastico Friday!” Unfortunately it wasn’t so Fantastico for the Jobs Jamboree… Here’s the skinny…

March job creation printed much worse than the negative 50K that was forecast. The total jobs lost in March reached negative 80K! OUCH! Now that’s going to leave a mark! But it gets worse folks… The previous two months were revised to show even deeper declines from what was originally posted. The revisions left January and February with negative 76K… The unemployment rate jumped to 5.1% from 4.8%.

There were no job sectors that showed positive growth. Even the services sector saw negative job growth. This is what I was talking about the other day, when I said that now the U.S. economy is going to have to deal with job losses. Face it folks… We’re in a recession. I think this jobs report should have been the icing on the cake for the economists that still think the U.S. can “avert a recession”. Remember how I laughed at them a couple of months ago when they would say those things, and tell them that we were already in a recession? Oh, well… As I’ve said before… Once the recession is officially announced, we’ll have the dollar put on the recession pants and walk down the street.

So… The jobs report was awful, but the dollar didn’t get taken to the woodshed. Instead it got one of those spankings that was more show than go. However, the dollar mini-rally that I said on Friday was looking like it was fading, did finally move to the back of the class on Friday, as the euro (EUR) was able to maintain the 1.57 level all day and through the overnight trading last night.

One currency that got caught up in the dollar’s mini-rally worse than others was the Japanese yen (JPY); it lost some very hard fought-for ground last week to the dollar, which tells me that carry trade had yet another life. But I’m not crying about the yen’s move last week. It’s not a crying time… It’s a buying time. I mean when a rallying currency moves more than 5% weaker in a week’s time, it sure does represent some cheaper buying opportunities, eh?

We will see a Bank of England (BOE) and European Central Bank (ECB) meeting this week. It’s the tale of two different central banks with these two. I believe we’ll see a rate cut from the BOE, while the ECB sits tight. We’ll also probably see the U.K.’s trade deficit increase. That, folks, is not a good recipe for a currency… A rate cut and rising trade deficit in the same week could spell trouble for pound sterling (GBP)… Beware…

The ECB will sit tight this week, and point to their official inflation rate of 3.5%, should anyone object to their sitting tight. Eurozone inflation of 3.5% really has the ECB fretting. They have no other choice… So… Recall how for at least three to four months I’ve been saying that I thought the ECB would cut rates in May? Well… I have to re-think that one. I just don’t see how the ECB will be able to cut rates with inflation at 3.5%. So, slower growth for the Eurozone is in order, but that was going to happen anyway with the U.S. recession!

So, if the ECB leaves rates unchanged even longer than previously anticipated, we could certainly see the euro avoid the “denting” caused by a rate cut, and get back to its assault on the 1.60 level. However, one must keep in mind that, should the ECB see inflation dip, they will cut rates and the euro “denting” will still occur. But, that scenario if fading more each day.

I have to get back to the Jobs Jamboree numbers again, because they were very telling. The Average Hours Worked rose, and so did the Average Hourly Earnings. What does this mean with all the jobs lost? Well… It means that those that still have jobs are working longer days, but at least they are being compensated for those hours. I think this report tells us that employers are preparing for a marked easing in growth.

The report also tells me that the Fed will keep cutting interest rates… I now expect the Fed to cut rates another 75 BPS total, at the next two meetings, leaving the official Fed Funds rate at 1.50%.

And that brings me full circle back to the “financing” problem I keep harping about. For the new readers, here are my thoughts on the biggest problem for the dollar in 2008…

The United States needs to attract approximately $80-85 billion in foreign investment on a monthly basis to finance our Current Account Deficit (the deficit). But it has had a difficult time attracting foreign investment since the credit crunch was exposed last August. In fact, for the entire year of 2007, the United States only averaged $51 billion in foreign investment monthly.

The Corporate Credit/Bond issuance has dried up, and when yields in the U.S. Treasuries  are paltry at best, there are just no other investments in the United States that can make up the difference. So… (I know, here I go again…) When a country has a financing problem they are left with only two doors to choose from… Behind door #1 we see the Fed raising interest rates aggressively to make U.S. assets attractive again, but by doing so, they bring the economy to its knees… Or behind door #2 we see the Fed allowing a debasement of their currency. In other words, allow their currency to weaken. As foreigners purchase investments, they have to buy dollars, and if those dollars are weak, the buyer is buying his asset at a “discount”.

When given the choice between what’s behind door #1 or door #2, a country will always choose what’s behind door #2!

OK… Back to currencies…

Last week, I mentioned that the Indian rupee (INR) had rebounded in the past couple of weeks, which means the government stopped intervening in my opinion. JP Morgan just issued a report telling investors to swap dollars for rupees, and take advantage of the interest rate differential. They also believe the Indian Central Bank will be hiking rates in the near future to combat rising inflation.

In Australia overnight we saw a reversal of the recent trend of the trade deficit to narrow. Australia’s trade deficit hit A$3.29 billion in February, up from January’s figure of A$2.54 billion. This is the first month the trade deficit had risen in the last three reports. That troubles me… I just don’t like deficits! And I don’t like countries that run up large deficits! Australia’s isn’t out of control… But it’s still a deficit!

New Zealand’s deficit IS OUT OF CONTROL! But… You know that, because I’ve told you about that for some time now!

Commodity prices rebounded last week, thus giving some love to the commodity currencies of Australia (AUD), New Zealand (NZD) and Canada (CAD)… The Canadian dollar/loonie continues to hover around parity to the green/peachback. This is pretty much the scenario I put down for the loonie… Weakness from Bank of Canada rate cuts, but strength from commodities.

Speaking of trade deficits… The U.S. trade deficit for February will print on Thursday, along with the budget deficit. The data cupboard will yield a lot of “second tier” reports this week other than the deficit reports. We’ll see consumer credit today, which should be around $6 billion, and pending home sales tomorrow.

The Chinese renminbi (CNY) has been stuck just above the 7 handle for the past week. I think the 7 handle is quite psychological. It won’t be long though, and we’ll see the renminbi trading with a 6 handle.

So… Are you anxiously waiting for your “stimulus” check? They should be going out soon. I read a report this weekend that an economist believes the recession will be avoided because of the stimulus checks… I laughed out loud (LOL) and my little buddy, Alex, asked me what was so funny. I told him that it was just some people saying “funny things”.

Currencies today 4/7/08: A$ .9245, kiwi .7940, C$ .9935, euro 1.5710, sterling 1.9875, Swiss .9870, ISK 72.51, rand 7.7975, krone 5.0810, SEK 5.9650, forint 162, zloty 2.20, koruna 15.93, yen 102.50, baht 31.65, sing 1.3815, HKD 7.79, INR 39.96, China 7.0010, pesos 10.55, BRL 1.71, dollar index 72.16, Oil $107.49, Silver $17.91, and Gold… $916.67

That’s it for today… I barely saw any of the two Final Four games on Saturday. It was just too nice of a day to sit inside, and then I saw some of the second game when we went out to dinner Saturday night. My beloved Cardinals had a great weekend, sweeping the Washington Nationals. The season has started off nicely, but it’s a marathon, not a sprint! Speaking of marathons… Our own Chris Gaffney ran in the St. Louis Marathon yesterday… And our little Christine ran the half-marathon… My lovely neighbor, Lisa, ran the half-marathon too! Congratulations! Well… I’m running late this morning, so it’s out the door with this! I hope you have a Marvelous Monday!

Chuck Butler
April 7, 2008

The Daily Reckoning