Dollar Tanks after Another Horrid Month for Payrolls

It is no secret that the U.S. economy is in trouble but the latest non-farm payrolls report shows just how bad things really are. Non-farm payrolls rose by a mere 18k in June, less than 20 percent of the market’s forecast. After two consecutive months of payrolls rising by less than 50k, even if the Federal Reserve does not want to, they will have to seriously consider the possibility of QE3. Not even the most pessimistic economist on Wall Street expected such a weak print, which explains why we have seen such a violent reaction in the dollar. Europe has its own problems but the pace of the U.S. recovery has fallen far short of everyone’s expectations and President Obama’s election prospects will be in serious trouble if non-farm payrolls do not rebound next month. Aside from a significantly weak headline number, the past month’s report was also revised down to 25k from 54k. With new entrants exceeding the number of new jobs, the unemployment rate ticked upped to 9.2 from 9.1 percent. The labor market is moving in the wrong direction and because of that the U.S. economy is in big trouble. Although the EUR/USD has rallied off the weak numbers, risk aversion could quickly take over, driving all of the high yielding currencies lower. The non-farm payrolls report in May was already shockingly weak but today’s number has stunned investors who have reacted by selling dollars. One month does not make a trend but two months of weakness is a big problem. Throughout the past year, the missing ingredient in the U.S. recovery was jobs. As the U.S. economy stabilized, American companies stopped laying off workers but unfortunately this did not translate into more hiring. U.S. companies are flush with cash but they are hoarding and not spending it. Last month, the unemployment rate ticked upped even though the U.S. economy added jobs as hiring failed to keep pace with new entrants. Today’s report will make the central bank much more worried about the outlook for the U.S. economy and if next month’s jobs number fails to rebound, then the possibility of more stimulus could become a reality. Between now and then, investors will be very weary of holding dollars.

After the market has digested today’s weak labor market report, the focus next week will quickly shift to consumer spending with retail sales on the calendar. According to the latest ICSC and Redbook retail sales reports, consumer spending is on the rise. The International Council of Shopping Centers said retail sales rose 6.9 percent yoy in the month of June compared to 5.4 percent in May. Yesterday Johnson Redbook also reported a 0.9 percent rise in chain store sales. If retail sales rebound next week, it may take some of the pressure off the dollar.

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