For the first time in 4 years, non-farm payrolls dropped on a month to month basis. The July number was also revised down from 92k to 68k. This is a very bad contraction and gives the Fed no choice but to cut interest rates on September 18. The choice is now between 25 or 50bp and at this point, a half point cut is a real possibility.
Even though Fed officials were hawkish yesterday, they cannot stop ignoring the fact that the subprime and credit crisis has indeed hit the real economy. Americans are feeling the pain and this will translate into weak consumer spending which will drive speculation for a possible recession. The most immediate impact of the news is on carry trades and USD/JPY which has fallen more than 100 points after the number. The prospect of slowdown in the US economy is likely to make investors much more risk averse going forward. The dollar is also lower against the Euro and British pound. The one possible offset to further weakness in USD/JPY could be a sharp rally in the US stock market but even that may not be enough.
A weak number was expected but not one this bad. The laundry list of why non-farm payrolls could have been weak was endless. The employment component of the service sector ISM report released yesterday dropped back into contractionary territory for the first time since September 2003 to match the lowest level seen since March of that year. At that time, payrolls increased by a mild 81k in September and dropped by 196k in March.
By Kathy Lien, Chief Strategist of DailyFX.com