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My Home About Me My Two Cents All Eyes (including Gentle Ben's) Will Be Squarely Focused On Jobs Tomorrow Posted on 09/07/2007 15:38:14 | Link | Post Comment Fed is being "encouraged" by the government to persuade banks to assist sub-prime borrowers with their mortgages. The government wants banks helping borrowers for the next couple years as mortgages reset to higher interest rates and cause another round of mortgage problems. We'll see if they take the government's suggestions soon. Will It All Come Down to Tomorrow? On top of all of the sub-prime/credit crunch problems, the Fed is also tuned into the latest economic activity like never before. For instance, many want to know if the Fed is likely to reduce interest rates when they meet in a couple of weeks. Much of the answer to that may lie in tomorrow's upcoming NFP report (non-farm payrolls which tracks job creation in the U.S.). If this number comes out below the 100,000 mark and unemployment ticks up a bit, then the Fed will be more inclined to lower rates than if jobs hold up strongly. Keep an eye on this report as it's released tomorrow morning. It may hold the key to near-term interest rates. Bernanke has stated that the Fed will be monitoring the most important near-term data closely. Advertisement Wall Street Lies EXPOSED! They've led you to believe that investors who want outsized gains must take on ridiculous risks. Click here to learn how a Small One-time Investment Could Grow Until It's Larger Than All of Your Other Investments Combined. More Jobs = More Spending Money So why would jobs be so important to the Fed? Well, if more jobs aren't created and unemployment heads higher, then there's less money in consumers' pockets to spend. If consumer spending gets hurt, then retail sales will slump. Consumer spending accounts for a huge portion of the overall GDP in the United States. So a slow down in consumer spending might also cause overall economic growth to cave in. All of this could cause a downward spiral leading to a recession. The Fed would like to avoid that at all costs. So how do they do that? They avoid it by lowering the interest rates. Lower interest rates makes it cheaper to borrow money and therefore easier for corporations to expand and grow (and for Wall Street to speculate). Expanding corporations means better earnings. If corporations are doing better, then they can hire and expand as earnings increase. So you can see how important this information is to the Fed - especially during a turbulent moment in the markets like recently. As you can see from the chart above, job creation grew quite well from 2001-2004. Then from that point, job growth went somewhat sideways in 2005 and continued into a slight decline in 2006 and 2007. Now job growth has dipped below the 100,000 mark a couple of times now. For instance, last month it came in at 92,000. When job creation goes into the sub 100,000 mark, the Fed starts to pay attention. All eyes will be glued to this number on Friday to see where it comes in. This will give you greater insights into the future direction of interest rates. If they lower interest rates, it won't be good news for the U.S. dollar. The U.S. dollar is the biggest mover of currency pairs, so this may give us clues into the future direction of a pair should the dollar slump. Lately, currency pairs have been treading water, waiting to get some direction from the Fed. In the upcoming weeks, we could see some serious moves in many of the major currency pairs as it becomes clearer what the Fed's intentions are. Regards, Mr. FX Advertisement The Subprime Crisis Isn't Over Yet and the Next One May be Brewing Will you know where to look for it when it comes? Will you know what to do when it hits? Find out how to turn these devastating market shocks into spectacular financial gains. Click here to find out more! Making "Cents" of the HeadlinesECB Steps Up to the Plate to Curb Sub-Prime Threats What Happened: The European Central Bank (ECB) left its key lending rate unchanged yesterday, but implied that it stands ready to hike rates again in the future. Also, in response to massive market volatility, the ECB pumped €42.2 billon (US$57.7 billion) worth of emergency cash into money markets. How Markets Reacted: On ECB President Jean-Claude Trichet's command, the euro rose against the dollar after he implied there might be another rate hike on the horizon. Meanwhile, the ECB emergency cash created the biggest drop in overnight borrowing costs in two years, according to Bloomberg What I Say: By demonstrating they're always willing to ride into the rescue, Central Bankers are actually encouraging major players in global finance to dream up even more complicated products to speculate in! This could lead to the next crises down the road, making the sub-prime credit-crunch look like a minor blip on the global financial screen. As for leaving rates unchanged, like the Fed, the ECB is playing the cards close to their chests. If they keep playing their cards right, the dollar could unfortunately fall farther against the euro. << My Home | The FX Markets Blog Home

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