We’re back in panic mode this afternoon, with US equity markets more than 2% lower during the first hour of trading, following the release of a larger-than-expected drop in non-farm payrolls.

The number of jobs lost in the United States over the month of June came in at 467,000 today - substantially worse than consensus expectations for a loss of 365,000 jobs and upping the total number of jobless American citizens to a staggering 7.2 million since the start of the recession in December 2007. [1]

A more in-depth look at today’s report reveals that factory payrolls declined by 136,000 in June after decreasing 156,000 the prior month, while payrolls at builders fell 79,000 following a 48,000 decrease the month before. Payrolls in services industries, which includes financial and retail services, fell by 244,000, significantly more than the 107,000 shed in May.

The non-farm payroll report contained a few revisions to the prior month’s data as usual, with the figure for May showing a revised 322,000 drop, better than the originally reported 345,000 decline. The data for April, meanwhile, improved by 15,000 to show 519,000 payroll reductions. The upward revisions in the prior two months were not strong enough to counter June’s truly dismal figure, however.

Not surprisingly, the US unemployment rate for June rose to 9.5%, marginally better than expectations for a larger rise to 9.6% from 9.4% in May. But the trend is still, nevertheless, pointing up, so there’s not much to be excited about here either.

A separate report, meanwhile, showed a marginal improvement in weekly jobless claims data. The number of Americans claiming first-time unemployment benefits (initial jobless claims) fell by 16,000 to 614,000 in the week ending June 27, while the total number of Americans claiming jobless benefits for more than a week (continuing jobless claims) fell by 53,000 to 6.702 million in the week ending June 20. Although these figures were roughly in line with expectations, they were overshadowed by the disappointing non-farm payroll data.

‘If you were banking on the US driving a vigorous recovery, think again,’ said Alan Ruskin of RBS Greenwich Capital. ‘The employment report can largely be taken at face value, and the face value story is a labour market that is not improving nearly as rapidly as the May data suggested.’ [2]

This afternoon’s US labour market report naturally did not bode well with Wall Street today – in fact, it may be the catalyst that pushes US equities into a phase of consolidation.

‘I would argue that we’ll have a correction between 5% and 15%,’ said Hugh Johnson of Johnson Illington. ‘I think this number could be the catalyst that starts the corrective process. It’s clearly disappointing.’ [3]

By 3:30pm (London time), the Dow Jones Industrial Average was knocked 178.96 points (-2.10%) to 8325.10, while the broader, more representative, S&P 500 lost 20.45 points (-2.21%) to 902.88. The Nasdaq was also lower, down 34.08 points (-2.3%) to 1447.26.

Crude oil and resource based stocks suffered as a result of this afternoon’s shocking data; August Brent crude futures contracts plunged 3.4% to $66.46 a barrel, while August WTI plummeted 3.8% to $66.7 a barrel.

Oil majors, which are correlated to the price of underlying commodities, also declined. Exxon Mobil and ConocoPhillips both traded 2% lower at $69.13 and $41.2 respectively. Chevron, meanwhile, declined 1.7% to $65.37. Alcoa, the largest US aluminium producer, slid 2.7% to $10.07 while Freeport-McMoRan Copper & Gold fell 1.6% to $49.71 and Newmont Mining lost 2.6% to $41.07.

US banks were also in the red, with Citigroup 1% lower at $2.94, Bank of America down 1.4% to $12.87 and Wells Fargo 2.13% in the red at $23.71.

Airline companies bucked the negative trend, however, rising on the back of an upgrade from Morgan Stanley. Continental Airlines jumped more than 5% this afternoon to $9.69, after the broker said it was likely to survive the fallout in the airline industry. Morgan Stanley also initiated coverage on Delta Air Lines, giving its shares a price target of $9. [4] Delta Air Lines rose only 0.3% to $5.87, leaving a potential upside of 53% from the current price, assuming Morgan Stanley’s price target is reached.

In corporate news, Exelon, the biggest American utility owner, lifted its hostile bid for energy producer NRG by 12% to $7.45 million today. Shares in NRG fell 2.8% to $25.32 while Exelon’s share price declined 1.9% to $50.57.

In Europe, the ECB kept interest rates unchanged at an all-time low of 1%, while Ireland had its top credit rating lowered a notch by Moody’s Investors Services.

[1] Source: Macroeconomic forecasts, consensus estimates and expectations in this commentary sourced from Bloomberg News, unless specified otherwise.
[2] Source: FT (2 July 2009)
[3] Source: Bloomberg (2 July 2009)
[4] Source: FT (2 July 2009)

By Anthony Grech, Research Analyst, IG Index.

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