Friday, September 07, 2007

US Employment Numbers Fall Unexpectedly

After an unexpected reduction of Jobs in the US in August markets in the US opened significantly lower. The bleak report of 4000 job losses was contrary to the expectation that hiring would continue to rise.

The last time the monthly figure was negative was in August 2003 when 42,000 jobs were cut. Also adding to the concern of a stalling economy was the revision of previous numbers by the US Labor Department. It revised its figures downwards by a total of 81,000 in June and July.

The number is significant because of how economists have got it wrong, a poll last week by Reuters had forecast that 110,000 jobs would be created in August.

Commentators are mixed on the significance of the number. Henry Paulson said during a TV interview last night that growth would pay a "penalty" because of the financial market disruptions.

Many see this latest development as a sure sign that the Fed will cut interest rates with commentators on CNBC stating today that the Fed should look at making cuts as soon as possible and making it very clear to the markets that this would be a "pre-cursor to a series of cuts".

A potential rate cut by the fed was seen in some quarters as 'bailing out' struggling financial institutions, with commentators saying that a cut should not be made so that the banks could be helped out of a hole they had got themselves into. Now those critics seem to have faded into the background and believe that a rate cut is now immanent with the Fed being able to justify it for economic reasons and not be perceived to be helping out the banks.

Our take on the situation at the moment is that there seems to be a split in the camp of opinions on where we go from here. In affect the Dow is only 5% of its highs so one would expect a pull back and profit taking of sorts, but there are those who believe the market will test the 12,800 lows. Comments from a trader on Wall Street were mirrored by one of our contacts in the spread betting market who suggested "if the Dow goes down to the previous lows of 12,800, I believe we will go significantly lower than that, things could unravel very quickly".

The more bullish position seems to be that there is still money around to stimulate the markets and we are better equipped to bounce back. There are more aggressive managers of funds around these days, hedge funds are prowling any undervalued asset and snapping it up. Don't forget the estimated $300bn that is still in private equity funds looking for a home and we have room in the interest rates to make significant cuts to stimulate the economy once more.

The Dow plummeted 150 points 10 minutes after opening (as I write) although the FTSE held steady at 75 points down, with 2 hours to play in the UK we could see this deepen.

Today will have to be looked at in context as to what happens in the coming hours and days, but it is not a good sign, that is for sure.

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