The USD starts the week mostly higher supported by the Fed's statement last week that the US economy is improving. Investors however remain concerned about the potential strength of the US economic recovery. This week's US economic data will be key to the debate over whether the US recovery remains fragile with Friday's release of US September unemployment the week's main event risk.
There were a number of developments in Tuesday's trade which may raise concern about the outlook for the US and global economy. US September consumer confidence posted an unexpected decline. The Conference Board reported that the outlook for businesses was poor and jobs remain hard to find. Also on Tuesday, the FDIC said that it will seek repayment of insurance fees from banks to try to bridge the FDIC funding gap. The FDIC raised its cost estimate to cover bank deposits for 2009-2013 to 100 bln from 70 bln. The FDIC expects more banks to fail this year. The FDIC currently has just 10 bln in reserves to cover FDIC funds. The FDIC would like to boost the fund to 45 bln with banks pre-paying three years of fees.
More uncertainty about the global recovery emerged Tuesday with news that the Russian central bank cut interest rates 50 bps to 10%. The Russian rate cut is a sign that the Russian economy needs more support. ECB President Trichet said the EU recovery will be gradual and the recovery outlook remains uncertain. Canada's PM Harper said that the Canadian recovery remains fragile and there is concern of what will support the economy once stimulus fades. The price of crude traded lower and has declined almost 8% over the past week reflecting weak global demand.
Weak labor markets remain the biggest hurdle to the US and global recovery. Wednesday, September ADP employment data will be released. The ADP report is expected to show that the pace of employer job cuts slowed in September with job losses at -200k compared to -293k in August. Thursday, jobless claims and ISM manufacturing will be released. Jobless claims for week ending 9/26 are expected to decline by -535k compared to -530k last month. Jobless claims losses in the 400k range are needed to confirm that the US economy is creating enough new jobs to match population growth. The September ISM manufacturing index is expected to expand to 54 from 52.9 last month. An ISM reading above 50 is an indication of expansion in the US manufacturing sector. Improvement in the New York Fed and Philly manufacturing surveys suggest that the September US ISM will continue to show modest improvement. The ISM could post its best reading in three years.
This week's key US economic report will be Friday's release of US unemployment and nonfarm payrolls for September. The September nonfarm payrolls report is expected to confirm that job losses continue to slow in the US with the consensus estimate of nonfarm payrolls to decline by 187k compared to -216k last month. The September unemployment rate however is expected to rise 0.1%% to 9.8%. The September unemployment report will be key to investor perception about the US recovery. A weaker than expected jobs report could dent optimism about the US recovery and dampen risk appetite. A continued rise in headline unemployment would increase fear of fragile US recovery. Since the mid-1990s full employment in the US was thought to be around 5%. A number of economists estimate that the fallout from the current recession will contribute to a jobless recovery and the unemployment rate may remain elevated for a number of years to come with the new level for full employment likely to be around 7%. US employment outlook suggests the US recovery will remain weak.
Despite uncertainty about the outlook for US employment the Economic Cycle Research Institute (ECRI), a New York based independent forecasting group says that its weekly leading indicator rose to a record high last week. The ECRI suggests that the US economic recovery is far from fragile. The improvement in the ECRI reflects improving US housing market. Housing starts rose sharply in August and unemployment claims continue to decline. Improvement in the housing market and the slowing of job losses suggest that the worst is over for the US recession. The FOMC policy statement for the September meeting said that the economy will likely recover slowly in the second half of 2009 and the FOMC remains concerned about the state of the labor market. Friday's US September jobs report will offer additional clues as to how fragile the US recovery may be.