Shockingly bad US payrolls adds weight to calls for QE3 and sends FTSE sharply lower

A shockingly bad set of US employment numbers on Friday afternoon sent stock indices sharply lower, with investors questioning the strength of the US economic recovery.

US non-farm payrolls badly missed market expectations, showing a meagre rise of 18,000 jobs in June, worse than May’s downwardly revised 25,000 jobs. The market had anticipated a rise of 90,000 jobs. Private payrolls were no better either, adding 57,000 jobs when the market was looking for 110,000, with May’s amount also downwardly revised. The unemployment rate rose form 9.1% to 9.2%. Everywhere one looks through the jobs numbers, there is not one inch of positivity about them.

These are a shocking set of US jobs numbers that will immediately raise questions about the strength of the US economic recovery and undoubtedly there are also going to be calls on the Federal Reserve to start QE3 soon to combat the drop in US activity.

The reaction in the markets to the jobs figures was quick and brutal. The FTSE 100 Index lost 75 points in the first minute after the data came out, a huge drop which, given the strong rally seen in equities over the last two weeks, is completely justified. There had  been a degree of heightened optimism before the release of the jobs numbers, with investors taking their lead from the much better than expected US ADP employment figures yesterday. This has most certainly exacerbated the situation today.

Investors fled risky asset classes en masse in the afternoon session, seeking defensive safe havens such as gold and the Japanese yen. As a result, gold hit a new two-week high above $1540 whilst the dollar/yen pair fell sharply by 0.7% below the 81.0 level.

What will the Fed do?
After the two weeks of rallies that equities have seen, June’s US jobs figures are a really bitter pill to swallow going into the weekend. The question now will be what will the Fed do? It’s likely that interest rates in the US will track a similar behaviour to the Bank of England and be maintained at low levels to encourage spending and growth. The main question will be whether Ben Bernanke, the Fed Chairman, is getting convinced that they need to be looking more into the possibility of a third round of quantitative easing and if so, in what size, method and time frame. Today’s jobs figures for June pose more questions than answers and as such, stock markets and the risk on/risk off mode that investors appear to be switching between almost on a weekly basis is likely to remain volatile.