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Good Jobs Helps Dollar

Better than expected jobs data from the US Department of Labor sparked US equity markets and stabilized the dollar on Friday. While the non-farm payroll report was encouraging, it hardly appears robust enough to dissuade the Federal Reserve from continuing its current bond buying initiative. US equity markets welcomed the news on two fronts; first that the Fed will most likely be continuing its support and secondly that while growth may be slowing in the second quarter, the hiring indicates the possibility of a strong finish this year.

The private sector added 175,000 non-farm payroll jobs in May, a significant improvement over April’s 149,000 new jobs. There are 4.4 million Americans that have been unemployed for more than six months. This poses a problem for the Fed who believes that many of these workers may not be employable without new skills.

In the last 12 months, the ranks of the long-term unemployed have decreased by about one million workers.  Over the last year, earnings have risen by a modest 2 percent, below expectations.

The manufacturing sector lost 8,000 jobs in May. This sector is troubled by the economic woes in the euro zone. The professional and business services sector experienced surprising growth adding 26,000 temporary jobs. It is hoped many of these positions will convert to full-time employment. As expected, the leisure and hospitality industry responded to seasonal demand showing excellent job growth as did the construction industry. Retail also posted strong gains.

Despite the gains, the jobless rate jumped to 7.6 percent. The rise is attributed to 420,000 persons entering the category. This is a positive development because there are more persons looking for work. The government’s household survey indicated that 63.4 percent of the population was engaged in the labor force.

The number of Americans unemployed for 27 weeks or less edged down to 37.3 percent. The average duration of the unemployed rose to 36.9 weeks. These are important stats the Fed monitors closely.

Terry Sheehan, an economic analyst with Stone & McCarthy Research Associates, explained his take on the data: “We don’t think there is anything decisive in this report to change our outlook for the Fed decision. We think it’s still probable that they will start paring the asset purchase program at the July meeting, but we have more data due in the next couple of weeks, retail sales in particular.

“If the economic data comes in stronger in the coming weeks the FOMC could determine that it’s time to start paring back purchases.

“As to the overall report, we think it’s pretty much steady-as-she-goes for payroll growth. The uptick in the unemployment rate is not particularly concerning. It may be that the late survey period in May meant that some college graduates entered the labor force earlier than usual.”

USD Stabilizes

The dollar settled after the payroll reports was released. The trend lately has been down. On Wednesday, ECG President Mario Draghi announced the ECB would not be increasing its stimulus spending. The news sent the euro to three month highs at $1.3306.  By late afternoon on Friday, the euro was trading at $1.3222.

Against the yen, the dollar has given away much of its gains in the last few weeks. In September 2012, the dollar was 77.12 yen. Earlier in May, the dollar hit 103.73 yen. Late Friday, the dollar bounced back from Thursday’s low to 97.52 yen.

The volatility is clear. This week, the dollar will suffer its worst weekly loss since July 2009.

With the news that Canada added 95,000 new jobs in May, the Canadian loonie gained strength against the dollar to $1.0225. The Canadian jobs report shows the biggest addition of jobs in more than 11 years.

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Disappointing US Data Shakes Markets

Disappointing economic data and a lackluster projection from the ADP National Employment Report sent US equity markets tumbling as the dollar turned sharply down. The data puts a heavy emphasis on the US Department of Labor’s non-farm payroll report for May which is due to be released on Friday.

The Institute of Supply Management’s services index actually edged up in April rising to 53.7, up 0.6 from April. Analysts had projected a reading of 53.5. A reading above 50.0 indicates expansion but the index has turned steadily downward after a high of 56.0 in February of this year.

Most distracting was the news about the new orders component of the report. New orders hit their lowest rating since July of 2012, coming in at 50.1, down from 52.0 in March.

The ISM report data for services was stronger than the data for the important manufacturing sector, which enjoyed strong performance in the first quarter 2013. New factory orders climbed in April but not rapidly enough to overcome the slowdown in March.

Perhaps the most alarming data came from a report detailed a sharp decline in unit labor costs, which fell by 4.3 percent in the first quarter. This is the lowest rating in four years. Analysts projected that the sharp lowering was due to inflated prices paid in the last quarter 2012 that enabled companies to capture end of year tax benefits before the possibility of impending tax increases.

The ADP report only covers the private sector employment. The precursor to the non-farm payroll report showed the private sector added 135,000 jobs in May, which would indicate a non-farm payroll gain of about 165,000. This will be offset by heavy job losses in the public sector, many which job cuts will be the result of the sequestration. The ADP report also lowered the jobs for April from 119,000 to 113,000.

Reaction to the ADP Report

US equity markets have been ginger since Fed Chairman Bernanke’s last appearance before Congress when he hinted that the Federal Reserve’s easing may begin to gradually decrease. The announcement was met with resistance by the market.

Bad jobs numbers would figure to ensure the Federal Reserve remains active with its bond buying initiative, but Wednesday’s news was met with headwinds across all equity markets. By mid- afternoon, the DOW was down more than 195 points. The S&P 500 was down more than 20 points and the NASDAQ shed more than 40 points.

Chief Investment Officer of the Solaris Group in Bedford Hills, New York, Tim Ghriskey, offered an explanation of the sentiment that ran through the markets; “Not great. Bad news is good news in this market lately because it keeps the Fed accommodative, buying bonds and interest rates low. We’ve seen quite a run in rates as well, in other words yields up and prices down. This could be the type of number that maybe begins to reverse that somewhat.

“The employment gain was below expectations and below the run rate of the first quarter. The rest of it actually looks the same, most jobs came from smaller businesses, most came from the service sector. We continue to see expansion of the workforce, job market, but growth has slowed since the beginning of the year and it is pretty much everywhere.”

Most economists project a slowdown in the second quarter 2012 but the market has defied logic. The equity selloff indicates the underlying edginess of investors.

Another negative factor was the sharp increase in mortgage rates, which could dampen enthusiasm for the recovering housing market. 30-year mortgage rates climbed 17 basis points. 30-year mortgage rates increased to a national average of 4.07 percent, the highest rates since April 2012.

Demand for refinancing also suffered a substantial downturn with applications falling off by 15 percent. New loan requests, a measure of the demand for housing, fell 1.6 percent last week.

If the Friday non-farm report is below 165,000 new jobs, the market could react even more strongly.

US Dollar Plunges

The dollar, which has posted consistent gains against the yen over the past six weeks, slumped on Wednesday, losing about 1 percent and falling below the 99 yen mark. The dollar fell as low as 98.99 yen before rallying to 99.12 yen. Two weeks ago the dollar soared above 103 yen for a brief period.

Japan’s equities continued to gain strength as a result of the weakened yen and the dramatic improvement in liquidity afforded by the Bank of Japan’s newest round of easing. Japan’s retail sales continued to post strong gains. On May 23rd, the Nikkei reached a 5.5 year high soaring to a more than 50 percent rise in 2013.

The euro has gained ground since Bernanke’s congressional appearance. The European Central bank appears poised to stimulate growth and ease austerity measures. This condition caused the German 10-year bond to ease 1.512 percent, down from Monday’s 1.534 percent, the highest in three months.

The euro edged above the $13.0 mark and the USAD gave ground against a basket of currencies on Wednesday.  US oil gained $0.79 to $94.09 per barrel.

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Bernanke Mixed Message Sends Nervous Tremors

Muddled messages from the Federal Reserve and a sharp downturn in China’s manufacturing sector and in consumer confidence, sent global equity markets into a tailspin in overnight trading. Better than expected employment numbers in the US brought some stability back as the DJ average rebounded from a triple digit losses at the open. For the week ended May 11, 2013, claims for state unemployment benefits after the first week dipped by 112,000 to 2.91 million recipients, the lowest number of claimants in five years.

Japan’s Nikkei share index .N225 dipped 7.3 percent overnight following data from China’s manufacturing sector and news that the euro zone’s extended pattern of contraction looked more ominous. The Nikkei index had been up a stunning 45 percent this year.

Japan’s newest easing initiative has driven the value of the yen down and led to a very liquid economy that is sputtering for growth. Japan’s profits and growth are stagnant giving reason to question the fantastic gains in equities. It is increasingly clear that global markets are reliant upon quantitative easing that in many ways outweighs output.

Tobias Blattner, a European Economist at Daiwa Capital Markets, told Reuters; “All the global developments we see in the markets right now are purely liquidity-driven, they are no longer underpinned by fundamentals. We must learn to live with that kind of volatility.”

Yen and Euro Rise  

Analysts appeared confused by Bernanke’s statements before Congress. During his questioning, markets slipped immediately. After the Q&A following the Congressional hearing, markets recovered. However, the minutes of the Federal Reserve showed support for reducing Fed’s aggressive purchasing policy if certain factors came into place.

Bernanke told Congress that growth hit 2.5 percent during the first quarter and that employment was encouraging but still well below acceptable levels. He also explained that inflation was steady at about 1 percent, half of the red flag milestone set by the Federal Reserve. Inflation has benefited from reduced energy consumption and pricing.

The dollar-yen dipped as low as 1.01.45 before rallying to 101.68, a 1.4 percent fall from Wednesday’s levels. The euro also made headway against the dollar, trading at $1.2894, a 0.3 percent gain for  the day.

Euro zone weakness is weighing heavily on global manufacturing.

Bernanke Leaves Analysts On Edge

One of the purposes of the Fed’s purchasing program is to increase wealth. Equity markets have been big beneficiaries from this strategy. Americans are saving at the highest rates in 4 years. Recent good news from the National Association of Realtors points to gradual recovery in the housing market.

Bernanke explained the impact of the Fed’s $85 billion monthly bond purchases;  “Monetary policy is providing significant benefits. Monetary policy has also helped offset incipient deflationary pressures and kept inflation from falling even further below the (Fed’s) 2 percent longer-run objective.”

The Federal Reserve’s minutes showed that several board members advocate reducing the purchasing program as early as June. This sent tremors through the equity and bond markets. The benchmark 10-year treasury bond climbed over 2 percent for the first time since March. Japan’s 10-year bonds climbed to 1 percent.

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Good Employment Data Bumps Markets

On Friday, the US Labor Department posted its Non-Farm Payroll report and global markets were swift to act on the positive trend. Private employers added 114,000 jobs and the unemployment rate dipped 0.03 percent to a four-year low of 7.8 percent.

Republicans were quick to criticize the release as a public relations coup for President Obama. However, the unemployment rate returned to the rate when Obama first took office in 2009. To arrive at the improved rate, July and August non-farm payrolls were increased by 86,000 jobs.  It was believed that the unemployment rate had contracted in July and August but the revisions indicate otherwise.

With the Federal Reserve’s QE3 added to this encouraging data, the impact could well be reflected over the next few months.  The Fed’s initiative is already showing positive results as the credit markets appears to be functioning more easily than in the past. There is one more non-farm payroll report due prior to the November 6 elections.

The employment report showed a loss of jobs in the manufacturing sector for the second consecutive month but the dormant construction industry got a boost of 5,000 new jobs. This is a reflection of a slowly improving housing market.

Government employment increased by 10,000 jobs.  This followed an increase in government employment of 45,000 in August.

What is of great importance to the economy and for millions of unemployed workers is the stability of the small business environment. A poll conducted by Vistage International, a consulting firm, indicates that the small business owner does not see a strong 2013. Thus, small businesses are hesitant to add workers.

The undercurrent about the US Fiscal Cliff is weighing heavily on small businesses. Rather than tax reform or austerity cuts, the small business person wants to know how the federal government will stabilize the economy and government spending before the end of the year. 57 percent of business owners stated that the expiration of the Bush Tax Cuts, set to expire December 31st, would definitely have a negative effect upon their business.

However, 12 percent of employers said they intended to add jobs in the next 12 months. Nine percent said they expected to lay-off workers.

Regarding marketplace uncertainty, 30 percent of business owners said the fiscal cliff was a serious issue. 17 percent pointed to political uncertainty as the biggest drain on their business. On the positive side, only 6 percent of the participants indicated tax accessing credit was a problem. This can be attributed to the Federal Reserve’s commitment to hold interest rates at historic lows through 2015.

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Spain’s Budget Preempts Bank Stress Test Results

Spain’s Prime Minister Mariano Rajoy unveiled his much anticipated 2013 budget that was quickly billed a crisis budget to lift the country from crisis.  The Euro gained some strength based on what appears to be severe budget cuts and far less severe tax increases than expected.

Spain’s 2013 budget relies heavily on an increased Value Added Tax (VAT) to increase revenues.  The budget has 43 moving parts that will make today’s distressed economy looks like a comfort zone by the end of 2013.  The 43 new reform laws will be introduced over the next six months. The budget includes mandated reforms to the labor market, public administrations, energy services and telecommunications sectors.  The most immediate question is how Spain can expect to reach a positive growth rate. This budget projects a 0.5 percent recession year.  That would be a dramatic reversal of form.

The manufacturing sector is down, housing values are down as much as 60% in some areas. There is large scale social unrest throughout the country.  There appears no hope for improvement of the 25% unemployment rate and this budget may very well expand that figure.

Under the Prime Minister’s plan, the central government will reduce spending or €13bn next year.  Spending, not including Social Security and interest payments, will be down 7.3%.  Revenues will increase 4% based on approval of a 15% increase in the country’s VAT.

Prime Minister Rajoy has come under fire from euro zone members because he has resisted applying for bailout funding.  However, in the tenuous political position the Prime Minister finds himself, the formal application may well lead to his immediate ouster.  Spain appears determined to grind out some form of recovery based on seemingly whimsical hopes of foreign investment.  Whether it is a matter of convenience or from some source of unannounced insight, Germany believes that Spain does not need assistance.

However, on Friday a report on the state of the country’s banking system will be released. Analysts project a minimum of 60 billion euros will be needed to stabilize the country’s banking and financial industry.

Two big concerns from the European Commission are how Spain will handle its pensions and what it will do about the retirement age.  Treasury minister Cristobal Montoro said pensions will increase by 1% in 2013.  He refused to answer questions as to whether the government would pay a rate of inflation on previous pension payments.  The possibility seems doubtful as it would add another six billion euros to the national debt.

The budget is based on a 0.5% recession rate for the upcoming year.  This, in itself, would be a major financial and economic turnaround.  The immediate response to the new budget was positive as the euro rebounded from two-week lows.  Any gains could well be overshadowed by tomorrow’s bank stress test results.

Expected tax increases were not included on the revenue side. This may ease some of the tension in Madrid streets but will certainly cause concern with foreign investors.

Ministry expenditures will be cut 8.9% across the board.  The budget will pressure provincial governments to increase their income according to preset limits.  This is very likely to cause a spike in unemployment during 2013.

Spain’s frustrated workforce may have expected even deeper cuts and higher taxes.  In order to qualify for bailout funding, Spain must formally apply for help.  The precursor to receipt of the money will impose the same limitations placed on Greece, Ireland and Portugal.  At this time, the euro zones fourth largest economy is trying to keep its independence and appease both frustrated euro zone neighbors and a hostile electorate.  While the Prime Minister’s budget will make progress, a lack of growth will only lead to more unemployment and more hostile protests.  Spain’s Prime Minister is in no-win situation.  Tomorrow’s bank stress test results may well be the final blow to Rajoy’s hopes for financial independence.

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Unemployment Rate Disappoints

Once again, the ADP Payroll number runs counter to the Department of Labor’s Non-Farm Payroll Report.  The optimistic ADP employment numbers were released on Thursday but today’s Labor Department Non-Farm Payroll report indicates that the private sector added 120,000 new jobs in the month of March.  The Labor Department data indicates 100,000 fewer jobs than the ADP survey.

Despite the disappointing news, the unemployment rate fell 8.2 percent, the lowest rate since 2009.  New jobs created in March settled at the lowest level since October 2011.  The reduction is attributed to the fact that unemployment benefits have expired for a vast number of workers and that a number of persons have stopped looking for work.

Earlier in the week, Fed Chairman Ben Bernanke commented that the recent successes in job creation would be difficult to sustain.  Bernanke had previously predicted that GDP growth would slow in the first quarter to an annually adjusted rate of 2 percent compared to the 3 percent rate enjoyed in the 4th quarter of 2011.

The disappointing employment numbers lend credence to speculation that the Federal Reserve is considering another round of stimulus spending. Bernanke continues to warn those who listen that the US recovery is on fragile footing. One standard that the Fed seems to use is job creation.  In a one-month cycle, Bernanke would like to see 300,000 jobs created.

There is speculation that the February employment gains were fueled by seasonal workers returning to the work force due to the warm winter weather.  However, the most encouraging component is that the manufacturing sector added 37,000 jobs.

Canada Employment Surges

While US employment figures teeter, 82,000 Canadians returned to work in March.  To understand the magnitude of this employment surge, analysts had projected the addition of just 10,000 jobs in March.  For the past six months, job growth in Canada had been flat.  However, the Canadian workforce had already returned to pre-recession strength.

Canadian unemployment dropped from 7.4 percent to 7.2 percent.  The Canadian jobs report stabilized the Canadian dollar against the USD.  The Canadian dollar settled at C$0.9938 against the dollar.  The number of investors flocking to the Canadian currency led to a 0.4 percent lift before the Easter weekend.

The numbers may well justify a Canadian interest rate increase in the third quarter of 2012.  If The Bank of Canada raises interest rates, the Canadian dollar will increase immediately.

Over recent months, the Canadian dollar has been a model of stability, never increasing or decreasing by more than $0.02.  The Canadian economy would suffer if the economic conditions in China or North America worsen.

The 2-year Canadian bond settled at 1.259 percent while the ten-year climbed 2 cents to 2.128 percent.  Canada’s good fortune seemed to positively impact the SD more than its own currency.        

The Euro

On Thursday, the euro fell to 3-week lows against the USD.  News from Greece never fails to impact the euro and with Spain in treacherous waters euro anxiety continues.  The Swiss National Bank is expected to initiate actions designed to pare the Swiss franc against the euro.  During the week, the euro fell 0.6 percent against the dollar.

Broad selling of the euro saw the currency dip below the 1.2 Swiss franc level for the first time since the Swiss National Bank established the 1.20 level as a cap in September 2011. The euro fell to 1.192 francs.

The plight of Spain will most likely cause the European Central Bank (ECB) to re-enter the investment market.  The action plan will be expected to stabilize the Spanish bond market.

Spain is the euro zone’s 4th largest economy.  The region’s 3rd largest economy is Italy, now run by technocrat Mario Monti.

To add to the euro worries, Greece is pressuring Greek bank shareholders to post billions of euros to re-capitalize the state.  April 20th is the target date for the contributions.  Failing to raise the necessary funds, it is probable that the state will nationalize the banks; not exactly the remedy investors have in mind.

In 2011, Greek bank shares have trimmed by 77 percent.  The banks are calling for 3.5 percent interest on any investments in the state.  Importantly, there “investor exhaustion” is a coined term that best decides the Greek debt.  And, everything about Greece remains exhausting.  Unfortunately, the handling of Greece and the strong possibility that another euro zone member may be falling by the wayside has signaled a retreat for investors.

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Markets Calm

Data is trickling in from government agencies that support the belief that a slow, steady recovery is in progress.  On Monday, Fed Chairman Ben Bernanke stated that the current recovery mirrored the more positive trend in the steady increase in jobs. Bernanke did not indicate that a third round of funding was necessary at this time, but he prefaced that remark by declaring that all options remained “on the table.”  This position also leaves the door open for another round of bond purchases that would be deigned to further increase job creation.

Global markets took note of Tuesday’s Consumer Confidence figures, which revealed that consumers were optimistic about jobs and better wages.  The consumer confidence index jumped to 76.2, the highest level since February 2011, and an increase from the 2012 February index of 75.3. 

On the whole, the measure of economic conditions, which includes input from various sectors, jumped to 86.0 in March, again the highest level since February 2011.  Analysts had expected an increase to84.5.  The barometer for February was 83.0.

The only index that fell below expectations was the important consumer expectations index, which came in at 69.8 at the end of March.  February’s rating was 70.3.  The one-year inflation index inched downward to 3.9 from 4.0 early in the month.  This is the highest reading since May 2011.

These stability trends got more support on Wednesday as durable goods rose 2.2 percent in February.  The measure came in below expectations but the market had already factored the possibility into their projections.

Peter Cardillo explained, “It came in slightly lower than the market had been expecting.  It is a very volatile index but it bodes well for the manufacturing sector.  We are at the end of the quarter and the momentum stays upside.”

Perhaps the most encouraging news came on Thursday. The Commerce Department released figures showing that household 4th quarter 2011 income increased more significantly than originally reported.  Disposable income jumped to an annual rate of $11.73 trillion, $10.8 billion more than the originally reported. Consumer spending for the past three months has been flat. However, business spending has increase 5.2 percent in the same time frame.

Importantly, the fourth quarter GDP growth remained at 3 percent but revised income figures indicated that the economy expanded by a healthy 4.4 percent.  Analysts attributed the income increase to the improved labor market.  The income level in the third quarter 2911 was 2.9 percent higher. 

GDP gross in the first quarter is projected to retreat to 2 percent. The US is hanging tough and projects slow but steady growth.  By comparison, many analysts are staking their claim that GDP will begin to expand in 2013.  From here, the view is quite different.  There appears no viable way for GDP to expand in the European Union or Euro Zone.  Going forward, the dollar appears undervalued against the euro.

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Construction Sector Slowdown Weighs On Pound Sterling

Pound sterling gains were halted in the overnight following the release of the Markit/CIPS UK construction PMI survey.  Although still relatively positive, survey results were worse than had been anticipated by analysts, leaving some still skeptical of any short term UK economic recovery.  As a result, the British pound traded slightly lower to yesterday’s high at 1.5841 against the US dollar.  The exchange rate hit as high as 1.5869 in midday trading yesterday.

According to the construction sector survey, index readings dipped to a 51.4 in January – below the December 53.2 mark.  Although this is the 13th consecutive month of gains, the figure stands as the weakest reading in 4 months and compounds fears that the recession isn’t just over yet.  Notably, however, today’s survey findings still portend to a thin silver lining for Europe’s second largest economy.  According to subcomponent readings, confidence among construction companies and business leaders continues to be optimistic – although the same companies are unlikely to add to current payrolls.

The recent round of optimism seems to have been spurred on by improving month to month comparisons in recent weeks.  Notably, manufacturing sector activity improved to an 8-month high, while confidence among consumers recovered to the highest in almost the same time period.

Given the overwhelming and rising optimistic sentiment, today’s results may be temporary as traders begin to shift their sentiment to a potential turnaround in the UK economy.  This should support the current sterling momentum – if at least for another session or two.

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Can the Australian Dollar Hold on to Record Gains?

The volatility of the last couple weeks has manifested itself in some unbelievable outcomes. In this post, I want to focus specifically on the Australian Dollar. When the Japanese disasters struck, the Aussie immediately tanked, as investors jettisoned risk and moved towards safe haven currencies. Only days later, it inexplicably rose 5%, en route to parity and a 28-year high against the US Dollar. The question is: will the Aussie hold on to these gains, or will it return to earth as soon as the markets come to terms with the misalignment with fundamentals?

The Australian Dollar remains buoyant largely because of interest rate differentials. Basically, Australia boasts the highest benchmark interest rates (4.75%) in the industrialized world, and investors are betting that it will rise further, perhaps to 5.5% by the end of 2011 and even higher in 2012. Given that the other G7 Central Banks probably won’t hike for a couple more quarters – and even then, rate hikes will be gradual and restrained – it’s only natural that yield seekers are flocking to the Aussie.

However, it seems possible that the markets have gotten ahead of themselves in presuming an airtight case for further rate hikes. While Australian inflation is somewhat high (2.7%), it has actually moderated slightly over the last six months. In addition, the rising Australian Dollar will help to mitigate inflation and hence make it less likely that the Reserve Bank of Australia (RBA) will hike rates. (How ironic that the markets’ bet on higher interest rates in Australia actually makes it less likely that those rate hikes will actually take place!).

Moreover, the domestic Australian economy isn’t performing as well as some people think. It is true that an investment boom in mining and a surge in commodities prices have provided an economic windfall. On the other hand, the strong Aussie has undermined strength in the manufacturing sector, the housing market is poised for correction, and the summer flooding will crimp at least .5% from 2011 GDP.

In fact, not only is it not guaranteed that the RBA will hike rates, but some analysts think it’s possible that the RBA will cut its benchmark cash rate before the end of the year. At the very least, analysts need to double check their assumptions and re-jigger their interest rates models.  Given that the Australian Dollar is primarily being supported by expectations for higher interest rates, that also means that investors to scale back their forecasts for the Australian Dollar.

Personally, I think that a bubble is beginning to form in currency markets, at least in certain corners of it. Due to commodity prices and relatively high interest rates, the Aussie is certainly one of the more attractive major currencies at the moment. At that same time, that it has risen so fast in the last few years – and especially in the last few weeks – strikes me as fundamentally illogical. At this point, its rise has become self-fulfilling; investors want it to rise, and so it does.

At this point, there are two possibilities. Either the markets will wait for fundamentals to catch up with the Aussie, and it will hover around parity or appreciate slightly, or investors will recognize that it has appreciated too much too fast, and its correction will become one of the major events in forex markets in 2011.

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Government Trims 202,000 in July

Analysts may have talked a good game, but in their hearts they knew the Friday jobs report from the U.S. Department of Labor Statistics would be bad news. They were not surprised.  Wall Street dealt with the staggering numbers with relative ease as the dollar slumped and the euro moved higher in early morning trading.

Despite the non-farm payroll loss of 131,000, bulls continued to assert themselves in volatile marketplaces.  Overall, corporate earnings are strong and while companies are talking additional trimming rather then new jobs, there is a feel of a very mild recovery underfoot. 

Private employment added 71,000 new jobs after adding just 31,000 in June.  Analysts had predicted 90,000 new jobs would be added in July.  These same analysts predicted overall employment falling by 65,000.

The unemployment rate held firm at 9.5 percent, but there is concern that thousands of potential workers have dropped out of the system as their benefits expired.  Some analysts believe the recent extension of benefits has created the increase in unemployment.

Analysts were surprised by the 202,000 jobs trimmed in July by federal, state and local governments.  In June governments cut 252,000 workers.  The Federal government cut 154,000 jobs, state governments trimmed 10,000 workers and local governments trimmed 38,000 workers.  In the federal government’s cuts 143,000 people were temporary census workers.

Most local governments begin their new fiscal year on July 1st.  Most local governments are under tremendous pressure to continue providing services but with reduced work forces.  Cuts in state operations can be expected to rise as just about every state in the Union is carrying significant deficits as they approach the close of their fiscal year.

Manufacturing Leading The Private Sector

In the private sector, the manufacturing sector added 36,000 workers and led the way again in July.  Manufacturing added 13,000 jobs in June.  The auto industry reversed its traditional pattern by not laying off workers in July.

The service sector added 38,000 new jobs after gaining 34,000 in June.  The temporary services sector, which has been solid since October 2009, trimmed 5,600 jobs after adding 11,200 in June.  Temporary employment averaged 45,000 new jobs per month from October 2009 to May 2010.

Of the 15 subsectors composing the private sector, three reported job losses, one was unchanged and 11 reported gains. 

  • Professional and Business Services – Down 13,000
  • Financial Services – Down 17,000
  • Construction – Down 11,000
  • Non durable good – Unchanged

 On The Positive Side

After falling to 34.1 hours in June, the average workweek increased to 34.2 in July.  Average hourly wages increased by 0.2 percent in the month as the average hourly earning rose four cents to 22.59.

These are positive signals but one of the most important numbers is the growth of the GDP.  Global markets are expecting the U.S. to add significantly to our Gross Domestic Product.  Economic growth fell to a projected 2.4 percent this year after rising to 3.7 percent in the first quarter.

Federal government expenditures now stand at 25 percent of the GDP.  The Obama Administration must either spark GDP growth or decrease the cost of government.

In early afternoon news, Goldman Sachs predicted that unemployment would rise to 11 percent and remain there through 2011.  Unemployment now stands at 9.5 percent.  Most analysts projected a rise in unemployment top 9.6 percent.

President Obama responded to the labor report saying that July marks the seventh consecutive month that the private sector has added jobs.

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