Non-farm payrolls failed to live up to the market's expectations, causing the U.S. dollar to plummet against the Japanese Yen. Although an addition of 431k jobs is the largest monthly gain since March 2000, it does not provide the sticker that a half million jobs would. However what made the NFP report even more ugly was the minuscule increase in private sector payrolls which rose by only 41k, against expectations of 180k. In our payrolls preview, we said the number to focus on is private sector payrolls because the headline number will be distorted by temporary census hiring. Government jobs accounted for more than 90 percent of total payroll growth and private sector jobs accounted for less than 10 percent. So even though the U.S. government has been successful in giving a large amount Americans part time work, corporations are not hiring as aggressively as everyone had hoped and as a result, the sustainability of the U.S. recovery has come into question. The latest NFP numbers reinforces Bernanke's concerns about high unemployment and suggests that the hawkish comments from Fed President Hoenig will fall on deaf ears. The Fed is not likely to move anytime soon and will most likely keep the extended period language in the FOMC statement after their monetary policy meeting later this month.
Taking a closer look at the numbers, the manufacturing sector and business services added jobs but cuts were made in construction, retail trade and the financial sector. The unemployment rate decreased from 9.9 percent to 9.7 percent while average hourly earnings rose 0.3 percent in May. Average weekly hours rose slightly from 34.1 to 34.2 which indicates that Americans are beginning to earn more and work slightly longer hours. There is no question that the U.S. labor market is improving but the pace of improvement has slowed dramatically. If it does not pick up in the summer, private sector payrolls could turn negative once again.
EUR/USD Aiming for 1.20
The U.S. labor market numbers may be the biggest focus in the financial markets this morning, but the biggest story of the day could be the sell-off in the EUR/USD if it breaks 1.20. The currency pair has already fallen to a fresh 4 year low and the disappointing U.S. numbers failed to provide any support. The 1.20 level in the EUR/USD is within a whisker of current levels and we continue to believe that it is just a matter a time before it is tested and broken. The latest liquidation was triggered by comments from France and Hungary. EUR/USD traders had to put on their tin hats when French Prime Minister Fillon endorsed a weaker currency by saying he is not worried about the current exchange rate and sees only "good news in parity between the euro and U.S. dollar." This implies that if investors were banking on verbal intervention from individual governments - they will have wait longer. The ECB may be independent but Finance Ministers are influenced by the leaders in their government. Therefore we would not be surprised if the G20 sat on their hands this weekend and put most of their energy into the geopolitical turmoil around the world. Meanwhile Hungary is not a member of the Eurozone, but their troubles remind us that the problems in Europe have not gone away and increases the scrutiny on countries like Spain. This morning, the Prime Minister said default talk is "not an exaggeration." In fear of political backlash, they refuse to implement austerity measures or give up their tax cuts. For the EUR/USD to stabilize, the market still wants additional action from European policymakers. Until they give the market what they want, the EUR/USD may continue to fall. Here are a few of their choices.
Some are more realistic than others and the Europeans may even opt for something that is not on our list and if that is the case, hopefully it will be dramatic enough to save the euro AND the Aussie.
