The dollar’s recovery from its May low could be over, after Friday’s drop in US payrolls data.
It is hard to get a clean read on US employment data, which is still plagued by pandemic distortions. The 850k headline print beats expectations but estimates have not meant much in recent months. Furthermore, with Fed looking for signs of a “very strong” employment recovery which indicates further progress, Friday’s data will not do much to sway them in pushing forward tapering talk.
However, there are encouraging signs within the data, with supply constraints easing as workers return. New York and California lifted pandemic restrictions in June, boosting employment in the service sector. While unemployment rate rose to 5.9%, the broader underemployment measure, watched by the Fed, edged down into single digits at 9.8%.
Of course, workers on the side lines continued to curb hiring gains as participation rates steadied. The number of Americans not in the labour force, who are prevented from looking for work in May due to the pandemic, fell from 2.5 million in May to 1.6 million in June.
The Fed’s focus on labour outcomes, alongside the nod to the widening tail risk of sustained inflation in the June 16 FOMC, brings data dependence to the forefront of tapering speculation. Friday’s numbers suggest that the labour market is heading in the right direction after hiring has failed to keep up with broader economic momentum.
The Non-Farm Payrolls print for June, while better-than-forecast, is still within the ballpark of expectations. As such, it is unlikely to fire up the market’s imagination as it does not suggest “substantial further progress” in labour-market improvements.
This print argues for yields to tread water with a downward bias and for stocks to continue to be supported, which will lower the dollar as well.
The unemployment rate was higher than forecasted, worrying the Fed. Various Fed speakers have outlined in recent weeks that employment may be as much as 10 million below pre-Covid levels, and the data for June marks incremental progress without suggesting any quantum leap. In other words, there is no impetus to push the taper timeline forward.
Despite this, Powell has started the discussion about scaling back Fed’s massive monthly bond purchases and using the Jackson Hole, held from 26 -28 August policy retreat, to signal that a decision is at hand.
Even though policy makers do not expect to raise rates before 2023, 7 out of 18 projected lift-off last month, from current near-zero levels next year, amid anxiety over surging inflation.
Recent readings on the US economy have been volatile with supply bottlenecks affecting prices, while job creation has produced disappointing results. Officials say the data reflects glitches as the economy reopens and they expect to have a clearer reading in September.
Inflation is the key variable. Powell and other senior officials argue that the spike is likely temporary, promising to watch developments and reassess if longer-term inflation expectations were to drift higher.
This could bring forward the tapering and persuade more officials to pencil in rate hikes in 2022.
Fullerton Markets Research Team
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