Sharp Decline In US Non-Farm Payrolls Suggested We Are Not Yet Out Of Wood

The US employment report for June disappointed us, as well as the market, in many ways. First, decline in non-farm payrolls, by -467K last month, was much higher than expected and in May. The sharp contraction was brought by exacerbated employment conditions in services and construction sector. A 52K reduction in temporary payrolls after government census exerted additional pressure to the situation. Employment at auto dealers dropped 9K last month, signaling further declines will be seen in coming months as around 40K positions were slashed as Chrysler and GM went bankrupt. After seeing slowdown in the pace of job loss in previous months, we had anticipated the trend will continue, However, June's sharp decline suggested that the expectation is premature.

Unemployment rate rose to 9.5% (consensus: 9.6%) in June from 9.4% in the prior month. The less-than-anticipated increase was driven by decline in participation rate which slipped to 65.7% from 95.9%. The drop indicated that more individuals have become frustrated by the employment situation and decided not to look for jobs. Despite this, unemployment rate should still climb to 10% by end of the year.

Average work week plunged -0.1 hour to 33 hours during the month. Together with payrolls reduction, average working hours declines -0.8% mom and flat average hourly earnings during the month. These should have pointed to very weak reading for personal income in June.

Stocks tumbled and bonds rallied after the report as investors shed to lower risk investment as recovery outlook turned uncertain. Dow Jones Industrial Average and S&P 500 Index slid -2.63% and -2.91% to close at 8280.7 and 893.4 respectively. For the Treasury market, yields of 2-year notes fell 6 bps to 0.99%, the first time below 1% in a month while yields of 10-year note plunged 5 bps to 3.5%.

The dollar surged against major currencies as the market flocked to safe haven assets. Against the euro and franc, the greenback rose to 1.393 and 1.09, respectively. Added to the strength was ECB's decision to keep interest rate low and SNB board member's comment that the board is ready for intervention.