US Dollar: Rising Layoffs Poses Big Risks to US Labor Market
August 23, 2007 – 10:05 amToday’s recovery in the US stock market, carry trades and bond yields brought optimism back into the financial markets. News that BNP Paribas will be reopening its three frozen funds and reports that four of the nation’s largest banks tapped the Fed’s discount window as a vote of confidence has been taken very positively by traders and investors. Even though the rebound today was strong, which means that we could see a bit more extension tomorrow, traders need to be cautious because this is nothing more than a reflex rally.
There was as much bad news as good. All of the weekly reports including the ABC consumer confidence and mortgage applications fell sharply. Confidence saw the steepest drop in 20 years. Lehman Brothers became the first Wall Street bank to close down its subprime lending unit and will be laying off 1200 workers. In fact, layoffs are being announced on a daily basis. The estimated toll of subprime related job losses is approximately 37,000. Even for the companies that are not cutting back on their workforce, they are not likely to be hiring either.
The word on the street is that many companies have instituted hiring freezes. With the costs of borrowing increasing and demand for corporate issued commercial paper falling, keeping profit margins steady is the top priority for most companies. On a consumer level, a weaker labor market could put a big strain on household finances. On top of the rising cost of mortgages, credit card lenders are also increasing their terms of credit. This includes higher interest rates, lower lines of credit and more stringent review of finances. This would of course spell weaker consumer spending and eventually weaker us growth.
Source: Daily Fx
