U.S. Dollar up big on Thursday after Europe's Central Bank increases interest rates

Yesterday, Europe's central bank raised interest rates by 1/4 of a point but made it clear that they are unlikely to continue doing so. This seemed to energize the U.S. Dollar and push it back up to the bottom of its bullish trend channel. After making an historic bottom on April 22nd the U.S. Dollar rallied into mid June when it started to retreat. The day after the Fed left interest rates unchanged on June 25th the Dollar crashed through the bottom of its bullish trend channel.

The news that came that followed showed economic weakness:

• ADP's National Employment Report along with the Labor Departments Payroll Survey both reported national job losses of 79,000 and 62,000 respectively. It was the sixth straight month of job losses for the Payroll Survey.
• The Labor Department's new unemployment claims for the week ending June 28th increased by 16,000 and the previous week was revised by adding an additional 4,000.
  
• While factory activity based on the Institute for Supply Management's manufacturing index increased in June to 50.2 from May's 49.6 (i.e., from contracting below 50 to growth), factory orders went up only 0.6% for their worst performance in 3 months. In addition, orders for durable goods were flat while order for staples such as food and gasoline increased.
• ISM's non-manufacturing index fell to 48.2 from 51.7 - from growth to contraction.
  

What's behind this economic weakness? A tremendous increase in costs:

• The ISM's manufacturing and non-manufacturing indexes' prices paid components increased to extremely high levels: the highest level since July 1979 for manufacturing and higher than the index's entire 10-year history for non-manufacturing. This was due to the tremendous increase in crude oil and other raw material costs.
• August crude oil closed Friday up 13% in June alone to 144.18.
• August blended gasoline closed Friday up 7% in June to 3.549.
• September corn up 24% in June alone to 757.75

A large portion of crude's price increase is due to U.S. Dollar weakness. When the Fed starts to defend the dollar in deeds as opposed to words - commodities will likely plunge.

Confusion in 4 sources of employment data

There are four sources of employment data: ADP provides a snapshot of how many jobs it thinks have been added or lost in the U.S. economy based on their managing roughly 1/6 of all non-government payroll jobs. Last Thursday ADP reported an increase of 40,000 jobs in May. So far, good strength in the labor market.

The U.S. Labor Department reports once a month on jobs based on their "household survey" and their "payroll survey". The "household survey" reports gained or lost jobs by calling families (some 70,000). This picks up people who have jobs but are not in the payroll system (they pay estimated taxes - or they're tax cheats) and is responsible for the unemployment rate which increased for May from 5% to 5.5% Score one for a weak job market. But why didn't these people who lost their jobs apply for unemployment insurance (more about that below)?

The Labor Department "payroll survey" reported a loss of 60,000 jobs during May. The Labor Department calls the biggest 300,000 companies for their survey. How could their survey and the ADP survey both be correct at the same time? But, again, why didn't these people who lost their jobs apply for unemployment.

How do I know that most of them didn't apply for unemployment insurance? Because the Labor Department also produces a weekly report of new unemployment claims. According to these reports, new unemployment claims have fallen for 3 out of the last 4 weeks. In the most recent report new claims were 357,000 from a revised 375,000 the previous week. If lots of folks were losing their jobs I think most of them (except for those who aren't in the payroll system) would end up collecting unemployment checks.

Adding all of this up: the evidence points to a moderately strong labor market. I think we have to discount the "household survey" because it is known to be volatile at this time of year due to an influx of college kids into the job market. As to the "payroll survey" - the only way this loss of jobs makes sense in accordance with no increase in unemployment claims (and ADP's report of an increase in jobs) is if the people who lost jobs were able to get new ones in companies that were not part of the government's survey. ADP must have a much wider cross section of the U.S. economy.