Jobs Numbers Show Improvement... Or Do They?

Good day. I know many of you were opening up today’s Pfennig expecting to see the triumphant return of Chuck. Well, hopefully, you won’t send this right to the recycle bin when I tell you this, but Chuck informed both Mike and I that we were incorrect when we told you all he was returning today. He is actually returning to St. Louis later today, but this is his travel day, and tomorrow is still a bit of a question depending on how the flight back home goes. So I will bring you today’s Pfennig and Mike will fill you in tomorrow, if necessary.

As I left you last Friday, the markets were eagerly awaiting the monthly payroll numbers here in the U.S. The report released by the Labor Department showed employment increased by 163,000 jobs in July, after a revised 64,000 increase in June. This was well above the median estimates of an increase of 100,000 jobs. But the unemployment rate, which was released at the same time, showed an increase from 8.2% to 8.3%.

So we have two reports, both released by the Labor Department at the same time, one of which shows an increase in the number of jobs while the other shows an increase in the percentage of workers who were unemployed. What gives? There are a couple of answers to the perplexing set of data. First, the Labor Department gets the information to compile the unemployment rate from a different source than the data they use to calculate the numbers of jobs added each month. The jobless rate is derived from a survey of about 60,000 households that is conducted by the Census Bureau, while the change in payrolls is calculated from a Labor Department survey of 500,000 worksites. I could just see Chuck scratching his head and throwing up his hands at that one! You would think the folks in Washington, D.C., could figure out a way to use consistent data to compile reports that are released in tandem with each other.

There is another possible reason for the difference in the data. As the job markets have started to improve, more workers are “re-entering” the job market. After a certain amount of time, individuals fall off the rolls of the unemployed, as they no longer actively look for work. But as the jobs markets start to improve, some of these workers decide to try to find jobs again, increasing the labor pool and having a direct impact on the unemployment rate. This could explain why the rate ticked higher while the number of jobs also increased. This will be a continued problem as the recovery continues, and the administration is going to have to work hard to try to explain how they can tell you the labor market is improving even as the unemployment rate remains stubbornly high.

The numbers don’t shed any additional light on what the Fed will do at the September meeting. Fed Chairman Bernanke has said there needs to be job growth of 150,000-200,000 per month in order to lower unemployment, and with July’s number falling within this range, he may not feel the need for another round of stimulus. But the administration has to try to get the jobless rate below 8% before the elections, and they will be putting as much pressure as possible on the Fed to try to get them to do something to help force this lower.

As expected, the media helped the administration by focusing on the positive increase in jobs. Stocks rallied on the news, sending the S&P to the highest levels since May. Currency investors moved out of their “liquidity shelters” and back into the markets. This move was confirmed by the yield on the 10-year Treasury note, which climbed to 1.57% from 1.48% before the labor numbers were released.

The dollar had bumped higher just before the jobs numbers, but reversed course and dropped fairly quickly after the data were released. The euro jumped all the way up to $1.2444 before settling back down below $1.24. The best performers over the past two trading days have been the higher-yielding currencies of Mexico (MXN) and South Africa (ZAR), both of which increased 1.85% versus the U.S. dollar. Only the Japanese yen (JPY) was lower versus the U.S. dollar over the past two days, another sign that currency investors are moving back out of their safe havens.

The euro moved back off of its highs in early European trading after Italy’s Prime Minister Mario Monti warned that divisions over the debt crisis are threatening the continent’s future. Sounds like we should give Mr. Monti the nickname of Mr. Obvious! He was attempting to ratchet up the pressure on the Germans to try to convince them to allow another round of sovereign bond purchases by the ECB.

Another reason for the move off of recent highs on the euro was a report that showed European investor confidence dropped for a fifth month. An index measuring consumer sentiment in the euro region dropped to minus 30.3, from a reading of minus 29.6 last month. European consumers are definitely feeling the impact of austerity measures and are realizing the “gravy train” which they have been riding is starting to slow down.

The pound sterling (GBP) fell again versus the U.S. dollar after two reports showed housing weakness in the U.K. One report showed 49% of potential homebuyers said prices in their area were above a “fair and reasonable” level, while only 36% of sellers share that view. Another report showed house prices dropped 0.6% in July from June. Supply is overpriced, and demand is falling as the U.K. economy dips deeper into the second trough of a double-dip recession.

One of the bright spots in Europe has been Sweden, where manufacturing has kept the economy rolling through much of the EU debt crisis. The Swedish krona (SEK) took a hit this morning after a report showed Swedish service production fell 0.2% from May, when it gained 2.3%.

Technical factors are pointing to a possible rise in the value of the euro. Commerzbank AG, citing trading patterns, said the euro will probably rise to a more than six-week high against the yen should it breach an area of resistance.

Chuck was also looking at some technical data this weekend and sent me the following data from down in Florida:

  • As of July 31, USD net longs continue to be pared back, dropping from 134.9k contracts to 77.7k, a 14-week low and well down from the levels that prevailed in early June (275k)
  • The spec market still held a substantial net EUR short. Meanwhile, the spec market has rebuilt net longs in AUD, NZD and JPY.

The substantial short positions can create a situation in which traders have to rush to cover them on the first sign of strength (called a short squeeze), so having a substantial net short position in euros can actually turn out to be a positive sign for a currency. These short positions have already been placed, so the euro already reflects the negative impact of them while the possibility of a short squeeze increases.

Commodities aren’t getting squeezed as they continue to add to the gains of last week. The Australian dollar (AUD) is firmly above $1.05 and has made a couple of attempts at breaking back above the $1.06 level we haven’t seen since mid-March. The RBA will be meeting tomorrow, and most investors are now betting they will keep Australia’s interest rates at their current levels. The benchmark interest rate in Australia is the highest among major developed economies and has helped push the currency higher as investors move back into “risk” assets. The New Zealand dollar enjoyed another positive day and got within 0.2% of a three-month high in Asian trading.

The RBA is the only major central bank meeting this week, so the focus will move back to economic data releases here in the U.S. and in Europe. We don’t have any major reports out this morning, and have only consumer credit here in the U.S. tomorrow. So today’s currency markets will be looking at German factory orders and Italian industrial output numbers, which are scheduled to be released tomorrow morning.

On Wednesday, we will get the nonfarm productivity numbers here in the U.S., along with unit labor costs. Thursday brings us the weekly jobs numbers, along with a reading of the trade balance, Bloomberg Consumer Confidence and wholesale inventories. And we will end the week on Friday with the monthly budget statement, along with the import price index here in the U.S. Not much going on this week, which is a bit of a relief after that action-packed one we had last week.

Then there was this. Chuck sent me the following note on Friday night:

“Saw this over the weekend, and said, I’ve got to get this to Chris… So with the miracle of my iPad… I was able to copy and paste! From UPI:

‘The U.S. economy added 163,000 jobs in July. Although an improvement over the first quarter, the ranks of the unemployed swelled another 45,000.

‘The unemployment rate rose to 8.3% even as 348,000 workers quit looking for work and were no longer counted in the official jobless tally.

‘In the weakest recovery since the Great Depression, nearly the entire reduction in unemployment since October 2009 has been accomplished through a significant drop in the percentage of adults participating in the labor force — either working or looking for work.’

“Without doubt, the real unemployment numbers are much worse than reported here…once they were run through the BLS BS machine.”

Thanks to Chuck for sending that along!

And I have one more thing to add today. The Mars rover Curiosity landed this morning without incident. Hearing this started to get my blood boiling, as I wondered to myself just how much money we invested in getting that VW-sized rover all the way to Mars. I know I will probably get a bunch of emails from science folks touting all of the improvements the space program has brought us, but our problems here seem to me to be a bit more important than figuring out if there was ever water on Mars. But who knows, maybe Curiosity will somehow find a solution to our huge debt problems or the approaching fiscal cliff, or an answer we can share with the EU leaders on how to get them out of their debt crisis. Not going to happen!

Chris Gaffney
for The Daily Reckoning