Non-Farm Payrolls Improves but Unemployment Rate Soars!

Last updated 9/4/2009 9:05 AM ET (GMT -5) 10 Comments

Kathy Lien

Director of Currency Research, GFT

As promised, non-farm payrolls triggered a tremendous amount of volatility in the currency market. The knee jerk sell-off in the dollar was quickly erased, giving us the V shaped price action that is typical of the EUR/USD& #8217;s reaction to payrolls. For the 20th month in a row, the U.S. economy has endured negative job growth but the pace of layoffs have cleared slowed. Non-farm payrolls fell by 216k in August, the fewest in the past 12 months. This was better than the market had anticipated since the expectations was for a drop of 230k. The July data was revised only modestly lower from -247k to -276k. The big surprise was in the unemployment rate which rose to 9.7 percent the highest level since June 1983. The dollar sold off aggressively when traders saw the unemployment rate print because the market had only anticipated a rise to 9.5 percent.

However there is no question that the trajectory of payrolls has improved, which has brought relief to the currency market and helped the dollar recovered its gains after traders realized that the report was not that bad. With the initial post payroll volatility settling and the holiday weekend looming, the dollar should hold onto its gains.

Yet because companies are not firing as aggressively as they were in the beginning of the year, does not mean that the labor market has really improved. In our non-farm payrolls preview, we talked about how the health of the labor market depends upon what type of yardstick you are measuring things by – the word on the street or the official reports. Today, the household survey confirmed the struggle of many Americans that are without jobs, which is that unemployment rate remains painfully high. U.S. officials have also warned that the unemployment rate could rise even as the labor market and the economy improves. This report is right in line with the Federal Reserve's expectations and will therefore not alter their plans for exit.

Why is there Such a Big Difference Between NFP and Jobless Rate?

The Establishment survey which gives us the payrolls report gives us a more comprehensive look at the labor market because it gathers data directly from 400k companies whereas the Household survey which gives us the unemployment rate only surveys 60k households. Part of the divergence between these two surveys comes from the possibility that the household survey includes people who may have been self employed as consultants or poor recent immigrants working under the table. Unfortunately based upon this morning’s report, those people are losing their jobs.

The manufacturing sector also saw the 21st consecutive month of negative job growth but one good thing is that average hourly earnings have increased.

When Will the U.S. Labor Market Return to Growth?

For the time being, the trajectory of non-farm payrolls continues to look eerily similar to that of the 1980s (as indicated in the chart below). Assuming that this correlation continues, we could see positive job growth by the first quarter of next year if not sooner. Monster.com has already reported an increase in online job advertisements which is a step in the right direction.

Comments (10)

koolraul

September 04, 2009 at 10:00 AM ET

Hi Kathy,

So the NFP would be a more reliable measurement of employment activity compare to the Unemployment rate? Since the decrease in NFP is leveling off, this means that U.S. economy is potentially improving and thus this should be bullish on USD i.e., short the EUR/USD. At the same time, risk apetite would also increase and thus be bullish on EUR i.e., long EUR/USD. However if the NFP increase, this could be bad for U.S. economy and this should be bearish on USD i.e. long EUR/USD. If the U.S. economy looks bad as reflected in the equities market, the USD would be stronger against EUR because of risk aversion and should be short EUR/USD. Does this observation make sense? Can you clear up fog on this? Thanks.

klien

September 04, 2009 at 10:37 AM ET

Its a broader measure for sure. your confusion is a confusion that many people have right now. I think that ultimately risk appetite will still be the driver and so long eurusd on good nfp. Or you could just trade usdjpy which has the more logical reaction to good us data

koolraul

September 04, 2009 at 10:41 AM ET

Thanks. That's help.

Semaj

September 04, 2009 at 10:17 AM ET

K, from a chartist perspective wouldn't you expect a sideways move on the above chart. The first move down in the 80's lasted six months before a sidewys move and the recent down move was double that of the 80's. Then the 80's move was sideways for about a year before being lifted up. Couldn't we now expect about 2 years of a sideways move if we are comparing the two recessions from a chart pespective. Support would be in the fact that we are still negative in jobs growth and would take several months of positive growth to lift the chart which seems a long way off still.

klien

September 04, 2009 at 10:38 AM ET

Even if it is sideways, the trajectory is still up. But def not 2 years of neg job growth. Maybe 2 years of mild job growth

Jai Thomson

September 04, 2009 at 10:32 AM ET

EUR\CAD trade stopped out...

Another stop out :(((

clueless

September 04, 2009 at 02:13 PM ET

Hi, Before the NFP numbers came out, there were different consensuses out there. Bloomberg's consensus was -200,000, but other sources had -225,000, -230,000, and other numbers. The actual NFP came out somewhere in between, so depending on which consensus you were using, it was either better or worse than expected. I was going by the Bloomberg consesus, but the market went the opposite way from what I expected, I guess because most people were using different consensuses. So how do I know which consensus is the real consensus?

klien

September 04, 2009 at 02:15 PM ET

The Bloomberg consensus on the Bloomberg terminal was 230k. Not sure where you are getting your numbers from.

clueless

September 04, 2009 at 02:27 PM ET

I got my numbers from the economic calendar on the Bloomberg website. It's still there at 200,000--you can see it for yourself. Where is the Bloomberg terminal you mentioned?

Dario Fuentes

September 04, 2009 at 05:16 PM ET

Hi Clueless,
The bloomerg terminal is a paid service. There are a economic calendar in fx360.com as well as in other websites.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.