NonFarm Payroll Today

How Will Non-Farm Payrolls Impact the US Dollar?
The US dollar has strengthened across the board today ahead of Friday’s non-farm payrolls release. This may befuddle some traders as the greenback’s price action conflicts with the higher jobless claims report and the deterioration in the employment component of manufacturing ISM. According to our non-farm payrolls preview, job growth should decline for the fourth consecutive month. The market is currently expecting non-farm payrolls to fall by 78k and for the US unemployment rate to rise to highest level in 3 years. There is even a possibility that job losses could hit -100k. Over the past month, consumer confidence hit a record low and planned layoffs as reported by Challenger Gray and Christmas increased 27.4 percent. Continuing claims are also on the rise as the problems in the US economy escalate. Many people including Warren Buffet will agree that the US economy is already in a recession. During the last 3 recessions, there was a string of job losses that lasted for a minimum of 10 months. If this is true, we could see far more than 4 consecutive months of job losses ahead of us. In each of the past 3 recessions, the largest single month job loss was more than 300k. In this context, a 100k drop in April or May is not only realistic but nearly guaranteed. However, weak non-farm payrolls may not be enough to halt the recent rally in the US dollar. After the hawkish minutes from the FOMC yesterday, traders have rallied the greenback on the expectation that the Federal Reserve will not be raising interest rates again in June. Even if the drop in non-farm payrolls in the month of April is greater than the -80k decline in March, the Federal Reserve has the benefit of seeing the non-farm payrolls report for the month of May before making their next monetary policy decision. Therefore the market’s reaction to a bad number may be tempered for the time being and a good number of course would add fuel to the current rally in the US dollar. Sentiment and technicals also point to further gains for the US dollar and weakness in the Euro, which is discussed further in our Euro commentary. Meanwhile the manufacturing ISM number was stronger than expected along with core PCE. Although the 48.6 reading is still reflective of contractionary conditions, the performance of the manufacturing sector would have probably been worse had it not been for the benefits of a weaker dollar.

European Retail Sales Slumped in April, PMI Shows

April 29 (Bloomberg) -- European retail sales dropped the most in more than four years in April as rising fuel and food prices squeezed shoppers' budgets, the Bloomberg purchasing managers index showed.

The measure of sales growth in the euro region declined for a second month to a seasonally adjusted 41.8 from 48.2 in March. A reading below 50 indicates contraction. The index, which is based on a survey of more than 1,000 executives compiled for Bloomberg News by NTC Economics Ltd., is at the lowest level since its introduction in January 2004. Sales also fell from a year earlier.

The fastest inflation in 16 years is squeezing retailers' margins and weighing on consumer spending while at the same time discouraging the European Central Bank from cutting interest rates. The European Commission yesterday cut its forecasts for economic growth this year and next in the 15-nation euro region.

``Rising inflation is hitting households' purchasing power and is undoing some of the positive stimulus, such as strong employment growth and rising wages,'' said Nick Kounis, an economist at Fortis Bank in Amsterdam. ``The dilemma facing the ECB just gets worse.''

The euro fell almost half a cent after the retail sales report before recovering to trade at $1.5576 at 1:10 p.m. in Frankfurt.

Carrefour, Ikea Warning

Carrefour SA, the world's second-biggest retailer, and Ikea, the largest home-furnishings seller, said the industry is likely to suffer as global economic growth slows and commodity prices soar. Consumer companies have ``never before faced so many challenges,'' Carrefour chief Jose Luis Duran said earlier this month at the World Retail Conference in Barcelona, Spain.

Sales fell across all three of the largest economies in the euro zone, led by Italy, where retail spending dropped at the fastest rate in the survey's history. In Germany, sales fell the most in three months, while in France they declined the most since January 2006.

``Italian indicators have been on a predictable and steady downward trend for the past year,'' said Morgan Stanley economist Vladimir Pillonca, who predicts Italy may be the first and only country in the euro region to enter into a recession this year.

Praktiker AG, Germany's second-largest home-improvement retailer, said April 23 that its first-quarter loss widened on weaker demand. Chief Executive Officer Wolfgang Werner said ``the first three months were very bad in domestic sales.''

Sarkozy's Plan

Metro AG, Germany's largest retailer, today reported first- quarter operating profit increased about 14 percent as growth in Eastern Europe offset slowing sales at home.

While ``rising real wages and rising employment will have a positive impact on Metro's German business,'' the dynamic in Western Europe ``leaves something to be desired,'' Chief Executive Officer Eckhard Cordes said in a Bloomberg Television interview.

In France, ``inflation and the end of the rise in real-estate prices, and of the ability to take on loans, are weighing on consumption,'' said Yann Lepape, an economist at Oddo & Cie. in Paris. ``The trend is starting to go downward.''

French President Nicolas Sarkozy yesterday outlined measures to spur growth, including a push for price rebates at retailers, as accelerating inflation hurts consumer spending in the euro region's second-largest economy.

``Prices in supermarkets have increased more in France than in almost all other European countries,'' Sarkozy said last week in a nationally televised interview from the presidential palace. ``That's not normal.''

Margins Shrink

Gross margins fell in April at the fastest rate in the survey's history as purchasing prices in Germany and Italy rose and sales missed targets to the second-largest extent on record, NTC said.

European consumer confidence fell to the lowest in more than two years in March, according to the European Commission. The commission yesterday forecast the euro-region economy will expand 1.7 percent this year and 1.5 percent in 2009, which would be the slowest since 2003. Last year it grew 2.6 percent.

By contrast, the International Monetary Fund predicts the U.S. economy will expand just 0.5 percent this year and 0.6 percent in 2009 amid a housing recession.

Defaults on U.S. subprime mortgages have caused about $309 billion in writedowns and losses at the world's biggest banks and financial institutions so far and pushed up borrowing costs globally.

ECB's Inflation Fight

While the Federal Reserve has lowered interest rates to bolster its economy, the ECB has left its benchmark rate at a six- year high of 4 percent to fight inflation.

NTC said a gauge of expected sales for the coming month increased to 59.1 from 53.3 in March, partly because food and drink retailers plan to raise prices.

Nestle SA, the world's largest food company, last week said first-quarter sales rose 6 percent after increasing prices by the most in a decade for products from Nescafe coffee to KitKat chocolate bars.

For the Bloomberg retail indicator, NTC recruited a panel of companies in Germany, France and Italy, which together make up around 75 percent of total euro-area retail sales by value. The panel includes large chain retailers as well as smaller stores.

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