The U.S. non-farm payrolls could not be any worse as the U.S. economy experienced ZERO job growth in the month of August. This number was worse than anyone had anticipated and makes QE3 a near certainty. Even though the private sector continued to create jobs, nothing draws away from the fact that the labor market is abysmally weak. At this point, the Federal Reserve cannot afford to wait and will have no choice but to introduce another round of stimulus in September. U.S. stocks have collapsed on the news and the dollar weakened against the Japanese Yen. Even though the dollar found a safe haven bid against the euro and other high yielding currencies, it won't be long before investors start to put their pre-QE3 trades back on. There was nothing good about today's report - in addition to zero job growth in August, July payrolls were revised down from 117k to 85k. The unemployment rate held steady at 9.1 percent but average hourly earnings turned negative while average weekly hours ticked lower. This means that not only were there no jobs, but those with jobs are working less and making less. The U.S. labor market has always been a sore point of the U.S. recovery and now this dull pain has become a sharp throbbing cramp that cannot be ignored. The Federal Reserve will need to spring into action and encourage businesses to take some of the money they have been hoarding and start spending. The problem has never been a lack of cash for American corporations, but rather a lack of confidence. The recent slowdown in U.S. growth and volatility in the financial market has discouraged corporate spending and it is the central bank's job to encourage it.
Unfortunately their hands are tied and their abilities are limited. Every step that the Fed has taken so far has led to an end goal of lower yields but lower yields has not provide the panacea that the market needs. Although many people debated the effectiveness of QE3, to do nothing would be an even bigger mistake for the Fed. They can't just sit by idly and watch the U.S. recovery turn into a recession. With 3 weeks between the NFP release and the FOMC meeting, the central bank has plenty of time to weigh their options and to discuss it at their 2 day FOMC meeting. The market will be looking for a major announcement on September 21st and if the Fed fails to deliver, we could see a sharp pullback in risk. In the meantime, as we expected, the sell-off in USD/JPY has been limited by the fear of Bank of Japan intervention. The BoJ put a floor under USD/JPY below 76 and if it falls below that level, the Japanese could intervene. Higher yielding currencies such as the EUR/USD and AUD/USD are still in negative territory, but once the initial shock fades, positioning for QE3 could lead to a more broad based dollar sell-off.
The non-farm payrolls report has only made the appetite for Swiss Francs more voracious. Since the beginning of the week, the franc has appreciated more than 5 percent against the euro, 4 percent against the pound and 3.75 percent against the U.S. dollar. The recent deterioration in Swiss economic data has not stopped investors from parking their money in the safety of the Franc. It appears that the euro is no longer the best anti-dollar, the Franc is. With changes to austerity programs bringing the region's fiscal troubles back to the forefront and U.S. economic data showing continued renewed weakness, the Franc has become the market's favorite safe haven currency. Unfortunately the recent deterioration in Swiss data could force the Swiss National Bank to take decisive to fight against Swiss strength. Their options are limited - negative interest rates have failed to halt the currency's rise and intervention has only stopped the currency from rising temporarily. Nonetheless, if the Franc continues to appreciate, the SNB may have no choice but to act, even if it becomes futile.