Non-Farm Payrolls Drop for the First Time in 4 Years, Adding Pressure on the Fed to Do More

Non-Farm Payrollls were released this morning and if you think job growth was bad in December, they were worse in January. 17k jobs were lost last month, which is the first official decline since August 2003. No one can argue that these numbers are not recessionary levels and the Fed has no choice but to continue to lower interest rates.

The private sector added only 1k jobs while the public sector cut 17k. The biggest job losses were seen in the manufacturing , financial and business services. Average weekly hours also dropped for the first time in 6 months. The only good news is that December payrolls were not as bad as initially advertised. The BLS reported a 64k upward revision, bringing December NFP back up to 82k. The unemployment rate dropped from the psychologically crippling 5.0 percent level back down to 4.9 percent.

For the Fed this could mean another 50bp at the March meeting, but don't forget that February payrolls will be released before the next rate decision. For the US dollar, expect more weakness, particularly against the Japanese Yen. Carry trades will also suffer since further stress in the US economy will reduce the market's appetite for risk.

Originally we expected a return gradualism, meaning that the 50bp rate cut would be followed by a smaller move, but at this point, we may even see another intermeeting cut. A return to 1.00 percent interest rates is also a realistic possibility. Traders should hold their horses however since we have over 6 weeks before the next rate decision and incoming economic data could easily change the Fed's minds.

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