US Jobs Report: More than Just a "Bump in the Road"

Last week I was talking about how the euro (EUR) would move past 1.45 if the Jobs Jamboree was disappointing… I guess it was disappointing, because the euro is well into the 1.46 handle this morning! So… For more on the Jobs data from last Friday, here are some thoughts I had right after the number was announced…

The Jobs Jamboree last Friday was very disappointing, not just “disappointing” as I had called for ahead of time. It was so bad that without the McDonald’s hiring of 60,000 workers announced in April, the number would have been negative… But I’ve got an even larger mark against the number of jobs created in May reported by the BLS of 54,000… The BLS added 206,000 jobs in their birth/death model! Oh… But you didn’t hear about any of this on the cable news, did you? Of course not! They wouldn’t know how to investigate a government report if it was right in front of their eyes!

So… Only 54,000 new jobs created in May (and that’s not even really correct!) and at first the currencies didn’t react the way they had recently, with a disappointing jobs jamboree number… But, then the dollar was sent for a ride on the slippery slope, and the currencies got to the business at hand of taking liberties against the dollar… Did you see that guy, Goolsby (the White House Chief Economist, or something like that)? This guy continues to be the flag waver for the economy, when stuff like this gets up and smacks him in the face… Anyway… The guy I’m talking about, said that the Jobs report was a “fluke”…and a measly little bump in the road…

That’s sad, folks… Very sad, because when the government is in denial about an economy, we’re in for a bad run… Growth is slowing… The ISM said so… The leading indicators have said so… The Housing data said so, and the jobs data has said so… I guess it will be “big surprise” to the government officials when Big Ben Bernanke says this fall, that the economy needs more stimulus… They’ll still be in denial, folks… But you don’t have to be!

The thing that you normally see when a country begins to show signs of a double dip (or just a general slowing), is that interest rates will go nowhere for some time… And that’s what we have going on here in the US. Interest rates are not going higher…not now, not tomorrow, next month, or even next quarter. And if I’m right, and in the fourth quarter we see QE3, (although I’m sure the Fed will not call it that) then rates aren’t going higher the rest of this year! That gives the currencies from countries that already enjoy a rate differential to the positive, in their favor, a good bit of attractiveness. Yes… Dress them all up in their red dresses, cause we’re going out on the town!

So, that would be a currency like the Australian dollar (AUD)… that already enjoys a nice wide differential of yields (rates), and is one of the main reasons the Aussie dollar is $1.0750… Like I said the other day, though, I really feel that until the Reserve Bank of Australia (RBA) hikes rates in August, and the Fed implements whatever form of stimulus/QE this fall, the Aussie dollar will probably range trade… But that’s not so bad! Think about it… You have a currency that pays you 300 basis points (3%) more than the dollar or yen (JPY) in deposit rates, and in bond yields, you get more than 200 basis points more in a 10-year Aussie government bond versus a US Treasury 10-year bond… So… For just having funds on deposit, you’re rewarded with greater interest than you can get in the US or Japan…or even in Europe! OK… Where do I sign up? HA!

OK… I’m watching the euro actually lose some ground as I type away with my fat fingers… Seems that a German Finance Minister took it upon himself to make sure that everyone knew that the a second bailout for Greece was not certain, and that right now it’s only “suggestions”…

This guy is simply trying to throw the markets off the scent of a much stronger euro, based on a Greek bailout. I still believe that this will all be put to bed, and the can sufficiently kicked further down the road by the end of this month. The Germans don’t want to see the euro get “ahead of itself” here…

I saw this news this past weekend, while everyone was sleeping… The German newspaper, Die Welt, reported that the plan the Germans have come up with for Greek debt maturing 2012-14, is to have them volunteer to exchange this debt for new 7-year bonds… With all sorts of bells and whistles attached to the bonds to make them attractive…

You all may recall that I made this same suggestion a couple of months ago… To simply exchange present maturing bonds for longer term bonds… The only thing the holder would be out was the interest, but there could be some makeup applied to smooth out the wrinkles here… So, it’s nice to see that these guys took my suggestion!

And then later this week, in the Eurozone, the European Central Bank (ECB) will meet to discuss rates, among other things… The markets will want ECB President, Trichet, to throw them a bone, and I think that this is the meeting that Trichet puts down the tracks for a rate hike next month… Look for the words that usually signal such things from Trichet, like “vigilance” and “maintaining price stability”… If you see those, then the fix is in for a rate hike next month… Of course, ECB officials will do their best to downplay this pending rate hike, for once again they don’t want the euro getting “ahead of itself”…

Talk about a bare data cupboard! That’s what we have here in the US, this week… So, for a week, the markets are going to have to chew on the Jobs Jamboree… YUCH! … That doesn’t taste good! Not until Thursday will we see April’s trade deficit probably widen further… So, any further direction in the currencies this week will have to come from Greek Developments…

The Swiss franc (CHF) just has to be one big pain in the neck for the boys and girls over at the Swiss National Bank (SNB)… The franc is like the Energizer Bunny, and just keeps going on and on, and on, and… Well, you get the picture. The currency has no yield… But it has that “perceived title” of safe haven, which people flock to when there are geopolitical problems… Well, we’ve had more geopolitical problems in the past six months than you can shake a stick at, and the franc goes on, and on, and on…

Speaking of having a pain in the neck from a currency that just won’t behave… The boys and girls in the Brazilian government have thrown everything but the kitchen sink at the Brazilian real (BRL) to keep it from getting stronger, but to no avail… The real is back on the rally tracks and feeling stronger every day!

The Canadian dollar/loonie (CAD) continues to get dragged down by government claims that interest rates aren’t going higher… I find this to be strange, because oil is still around $100, gold is still above $1,500, and commodities, while getting whacked by claims that China would slow down, are still on the rally tracks… I think the markets are growing tired of the babble that the Bank of Canada (BOC) isn’t going to hike rates… We all know that to be a non-truth, that the BOC will hike rates again, probably when the kids go back to school!

Then there was this… Talk about geopolitical problems… This week, our friends (NOT!) over at OPEC will meet… That should be quite interesting! OPEC oil ministers brace for a stormy meeting…

Libya’s conflict likely will produce a fiery and highly politicized meeting when oil ministers of the Organization of Petroleum Exporting Countries gather Wednesday in Vienna, industry sources said. Qatar has openly sided with Libyan rebels, but other OPEC members are reluctant to follow suit because the EU hasn’t granted diplomatic recognition to the opposition government. Oil ministers are divided on whether to comply with requests from Western countries to increase production.

To recap… The Jobs Jamboree was not just disappointing, it was very disappointing, and that was even after some “adjustments” to the numbers… The weak jobs data put further question marks on the economy, and what I’ve said would happen – a call for further stimulus – comes along… That sent the dollar on a ride on the slippery slope, and the euro has traded all the way up to 1.46 this morning.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning