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USD: ISM Points to Weaker not Stronger Job Growth

Last updated 10/5/2011 10:10 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

Investors woke up this morning and realized that as promising as the Financial Times article about EU ministers looking at bank aid plans is, nothing has been confirmed by European officials and so there is little reason for optimism. The media has reported a variety of different rescue plan proposals for Europe but so far EU officials have denied all of them. Although we firmly believe that a deal is in the works and suspect that policymakers will surprise us in the same way as the 1980s Latin American debt crisis, we cannot undermine the challenges that European nations face in getting all participants to agree to a rescue package. This along with downward revisions to service sector PMI numbers explain why the euro is lower against the dollar. 

In light of the mixed U.S. economic reports this morning, there is little consistency in the greenback's performance. The dollar is up slightly against the euro, sterling, Swiss Franc and New Zealand dollar, steady against the Yen and Canadian dollar and slightly weaker against the Australian dollar. For the U.S., the big focus this morning is on the leading indicators for non-farm payrolls. According to Challenger Grey & Christmas, layoffs rose 212 percent in the month of September, which was the largest increase since January 2009. This sharp rise reflects more than 50k public sector job cuts (most of which are in the military) as well as 30k job cuts by Bank of America, the country's largest lender. Based upon the Challenger report alone, it is hard to imagine that there will be much of a recovery in the U.S. labor market. However losses in the dollar were mitigated by a rise in private sector payrolls. According to ADP Employer Services, U.S. companies added 91k jobs last month, up from 89k in August. Unfortunately given ADP's drastic overestimation of private sector payroll growth in August, investors have become skeptical of their rosy assessment of the U.S. labor market. The most reliable guide for NFPs tends to be the non-manufacturing ISM report which accurately forecasted the deterioration in job growth in August. The latest report showed service sector activity growing at a slower pace in September and companies shedding jobs for the first time in more than year. The ISM non-manufacturing index fell to 53 from 53.3 with the employment component dropping to 48.7, the lowest level since April 2010. The decline in service sector employment raises major red flags for Friday's non-farm payrolls report. Although economists expect a rebound in job growth, we are not as optimistic and caution traders against a downward surprise.

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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.