(As written for My Paper on 6 September 2011. Click here to enlarge)
The Non-Farm Payrolls (NFP) report on Friday was ugly and totally unexpected.
The median forecast of 86 economists called for an addition of 68,000 jobs. However, after the announcement by the US Labour Department, everyone was caught off-guard when the result showed a big fat zero.
This was the weakest reading since September 2010, and meant that that the US economy failed to add any jobs in the month of August. The unemployment rate stayed at 9.1 percent.
To make matters worse, July payrolls were revised down from 117K to 85K, which meant that the hiring was smaller than initially reported.
As I read more into the report, I came across another interesting point.
In August, the average hourly earnings for all employees on private nonfarm payrolls decreased by 3 cents, or 0.1per cent, to $23.09. This decline followed a gain of 11 cents in July.
Additionally, the average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour over the month to 34.2 hours.
The summary statement for all the dismal data above reads as “not only were there no new jobs created in August, but those who had jobs were working less and getting paid less as well.”
We’re calling for a mild recession at this point,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “We’ll see QE3 definitely,” she said.
In my view, with the latest jobs report, QE3 is not so much a question of “if” but a question of “when.”
What are some of the options that the Fed has when it makes its decision for QE3?
I would like to discuss 2 of them here:
1) Operation Twist
2) Asset Purchases
Operation Twist basically involves selling short-term bonds and using the proceeds to buy long-term bonds. Essentially, it serves to lengthen the maturity period of the portfolio.
Asset Purchases will have a bigger impact, although its effect is debatable. The first round of asset purchases was in November 2008, round two was in November 2010, and round three could be as early as 20th Sept, which is the date set for the next FOMC meeting.
Whichever option the Fed chooses, it is with three end results in mind:
1) To lower yields
2) To stimulate growth
3) To lower unemployment
The stubborn problem is that although the Fed has done well in bringing down long-term yields, growth has still been almost non-existent and unemployment is still hovering above 9per cent.
Will QE3 work? Yes – but not for long. However, for the Fed to stand aside and not do anything would be an even bigger mistake for global confidence.
Short EUR/USD at 1.4185
EUR/USD has fallen over 400 pips in the last one week, and the downtrend looks set to continue with the European debt crisis hogging the headlines and the horrid NFP report last Friday.
We will go short once prices retrace to 1.4185 and the stop loss is placed 50 pips above the entry. We will have 2 profit targets on this trade and exit the final position with a favourable 1:2 risk/reward ratio.
Entry Price = 1.4185
Stop Loss = 1.4235
1st Profit = 1.4135
2nd Profit = 1.4085