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US Dollar Strengthens, but Some Traders Think the ADP Number is Fishy
Wednesday, December 5, 2007
Going into Friday's non-farm payrolls report, the financial market had resigned itself to softer job growth. Today that sentiment was thrown out the window after the shockingly strong ADP employment report. According to the payroll provider, US companies added 189k jobs in the month of November, which was three times greater than the market's forecast. This number is fishy because it goes against the signals given by nearly all of the other non-farm payrolls leading indicators, but the number is so strong that it cannot be dismissed. Currency traders seem to believe that this number means a lot and perhaps it does, but the price action in bonds and Fed fund futures suggests otherwise. Bond yields are only up marginally and the chance for a 50bp rate cut is still close to fifty-fifty. If the market believed that the strong ADP number translates into a strong non-farm payrolls release, the odds for a half point cut would be back where it was a week ago which is 6 percent instead of 42 percent. Granted private sector payroll growth of 189k does point to non-farm payroll growth in excess of 200k. We think that this forecast is a bit lofty because that would call for the strongest payroll growth in over a year. We do believe that payrolls will be much stronger than the market's 80k forecast, but probably closer to 150k than 200k. Productivity and factory orders were also better than expected, but service sector growth fell short of expectations. The employment component of the ISM survey slipped to 50.8, which puts it right around the expansionary and contractionary level. Part of the reason why the dollar is strong today is also the hope that Treasury Secretary Paulson will save struggling homeowners from foreclosure by announcing an interest rate freeze on subprime mortgages tomorrow. If this manages to work, we could have some respite for the US economy.


Source: DailyFx
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