FOREX TRADING

The risk trade lives and breathes. The United States July employment situation report from the Bureau of labor Statistics was uniformly disappointing in detail and worrying in implication. But currency traders piled into the euro, the yen and the sterling and generally opted to see the anti-dollar comparison rather than the threat that a serious slowdown United States poses for the world economy. The euro rose to more than 150 points to 1.3332, the yen 82 points to 85.11 and the pound 130 point to 1.5996, within 90 minutes of the NFP release.There are few positive ways to interpret the Non-Farm payrolls data. The headline payrolls at -131,000 doubled the forecast estimate for -65,000. The June result was adjusted down to -221,000 from -125,000 a loss of 97,000 previously counted jobs. May’s number added 10,000. The difference between expectation and result was a miss of 153,000 jobs. Private payrolls did add 71,000 jobs, less than the 90,000 expected but the seventh positive month in a row. But the June number was more than halved by revisions, dropping to 31,000 from 83,000. Here too, the overall miss was 71,000, far greater than the market anticipated.

The second part of the employment situation report is the ‘household survey’ and it was as poor as the ‘establishment survey’ provides the data for the payroll and unemployment statistics. Employment here shrank 159,000 in July, after having slid 301,000 in June and 35,000 in May. Small business, self employment and new businesses which comprise the survey and provide the vast majority of newly created jobs have been shedding jobs for three months.

The employment report has been effectively presaged by the unemployment weekly unemployment statistics.

New jobless claims for the week of July 31st increased 19,000 to 479,000. Economists had predicted a drop of 5,000 to 455,000. The prior week was revised up 3,000 to 460,000 from 457,000. The four-week moving average rose 5,250 to 458,500 from 453,250. The weekly average over the past year has been 489,300; the six-month average is 459,500.

The four week moving average has been above 450,000 for 23 months, since September 2008, except for one week in mid March. That is one month longer than the prior record for this statistic which traces back to 1967. In the 1981-82 double-dip recession, the average was above 450,000 for 22 months, from September 1981 through June 1983. However, by mid June 1983, when the average crossed below 450,000, the economy was well on the way to recovery. By October that year it was below 400,000, the reading normally associated with strong job creation. In June of 1983 the economy generated 378,000 jobs, in July 418,000. In August NFP fell 308,000 but in September 1,114,000 jobs were added. From that point the economy went on to positive job creation for 27 straight quarters. Having now seen the July employment report, the worries of the Federal Reserve Governors are much more understandable.

Ben Bernanke’s very public concern for the strength and longevity of the US economic recovery is an unequivocal warning that the Fed is ready to open the quantitative easing tap once again. With the Fed Funds rate effectively at zero, and government bond returns at historic lows the Fed has run out of monetary tools to support the economy, that is, except for quantitative easing.

The $2.3 trillion Fed portfolio contains billions of dollars of soon to mature mortgage bonds and other assets. The funds from these expiring bonds can be kept at the Fed, allowing the portfolio and the money supply to shrink or they can be reinvested in other securities, preventing the currency stock from declining. By the end of next year $200 billion in bonds are projected to reach completion. In the context of at $14 trillion economy and an $8.6 trillion money supply (M2), the substantive effect on the economy and currency circulation of reinvestment would be slight. But it would be a powerful signal to the markets of the Fed’s commitment to support the US economy.

The US M2 money supply had been largely stable from November of last year to the end of April, averaging a little over $8.51 trillion per month for that period. Since then it has been steadily rising; in May it averaged $8.57 trillion; in June $8.61 trillion, with a peak in the last week of $8.62 trillion; in July it has been $8.60 trillion. These supply increases coincide precisely with the slowing of the American economy and the emergence of doubts about the pace and sustainability of the recovery, not the least at the Fed itself.

The likely trigger for a QE program by the Fed would be a return to rising unemployment. The circle from increasing joblessness to falling home prices and consumer confidence, restricted consumption, economic contraction and the potential financial and economic effects on a still weak economy might well prompt the Fed into action, despite its possible negative effects on the dollar, commodity prices and the funding of the Federal deficit.

Whether the Fed announces another QE program at the FOMC meeting next week probably depends on the July jobs data, to be released this Friday at 8:30 am. But the Fed Chairman has made his intention plain.