Bernanke Warns of Slower Growth, ADP Rebounds but Watch Out for Accuracy

April 2, 2008

The currency market is failing to react to Bernanke’s comments which suggest that if we have a stronger non-farm payrolls number on Friday, we could see a serious bottom in the US dollar.

The ADP employment report for the month of March was much stronger than expected. However I am skeptical of the accuracy of this report given the fact that it overestimated private payrolls growth for the last 6 months.

Nonetheless, the rally in the US dollar is strong enough to not ignore.
Although this strength may be partly due to the latest losses reported by German banks ($2.5B by WestLB and $23B by Deutsche Bank and UBS combined), the shift in risk appetite is the real driver behind the move. Gold prices are below $900 an ounce which confirms that the market is less risk averse.

The markets are simply relieved that another Bear Stearns style disaster has not occured over the past few weeks. No major financial institution is at brink of a collapse and in fact, the oversubscription to Lehman Brother’s stock deal indicates that investors still have money to spend.

Yet the comments from Bernanke and the possibility of another negative month of non-farm payrolls growth indicates that has nothing has changed.

Even Bernanke admitted that the housing market will continue to weaken, the unemployment rate should rise and the US economy could contract in the first half of 2008.

In fact, growth is still so troublesome that the Fed Chairman has practically relegated inflation to an afterthought. We all know that inflation is roaring its ugly head with gas prices at a record high and rice prices skyrocketing, yet all Bernanke could say was that inflation is a concern, but it should moderate (He also believes that growth should pick next year).

Interestingly enough, rate cut expectations have increased on the back of his comments with the odds of a 25bp rate cut at the end of the month now at 90 percent. The dollar firmed against the Yen but lost ground against the Euro and British pound.

If there were to be a major reaction to Bernanke’s comments in the FX market, it would have happened already. At this point, non-farm payrolls is the only thing that is stopping the dollar from seeing a more significant recovery. I believe that job growth should remain weak, but if it is not, then a quarter point rate cut may be warranted.

My non-farm payrolls preview will be released tomorrow after the Service Sector ISM report.

Posted in ADP, Bernanke, Fed Rate Cut, Fed Rate Cut Expectations, Federal Reserve, Forex, Forex News, US Dollar, US Economy, Wall Street Journal, non-farm payrolls, recession