Jobless claims and non-farm payrolls

Two popular indicators that investors frequently watch to measure the temperature of the labor market in the US are the jobless claims and the non-farm payrolls. Historically, the market has been focusing more on the monthly NFP prints, but the recent waves of selloffs due to the Covid-19 crisis has raised investors’ interest on the weekly jobless claims figures as the number of Americans filing for unemployment benefits has surged to over 6 million in the past two weeks.

In this post, we try to answer the following two questions that have been making the headlines in recent weeks:

  • Is there a link between jobless claims and non-farm payrolls?
  • As jobless claims are updated every week, does it lead NFP?

 

Jobless claims are a statistic that is reported every week by the US Department of Labor and counts the number of people filing to receive unemployment insurance benefits. There are two categories: initial – with people filing for the first time – and continued, which comprises of unemployed people who have been receiving unemployment benefits for a while. What is surprising this time is the recent rate of change of the initial jobless claims, which surged from multi decades lows of 200+ thousands to over 3.3mil, 6.8mil and then 6.6mil on April 4th. Prior Covid-19, initial jobless claims have generally averaged 360K since the 1960s, from lows of 200K to highs of 700K (figure 1, right frame). The number of continued jobless claims is now greater than the one experienced during the Great Financial Crisis, which reached a peak of 6.6 million in June 2009.

Figure 1

FI1

Source: Eikon Reuters

Non-farm payrolls are also released by the Department of Labor on a monthly basis as part of a comprehensive report on the state of the labor market, but do not include farm workers, private household employees or non-profit organization. It was reported that the US lost 701K jobs in March, which brought the unemployment rate to 4.4%. Figure 2 (left frame) shows a scatter plot of the continued jobless claims with the NFP monthly; we are currently sitting at uncharted territories, and we would expect the next prints of NFP to collapse to much lower levels in the coming months, which would raise the unemployment rate to more than 20 percent. According to the fitted line, a 701K drop in NFP would coincide with continued jobless claims of 4.5 to 5 million.

In figure 2 (right frame), we look at the yearly gains (losses) in NFP overlaid with the continued jobless claims times series. We can notice that to the exception of the Great Financial Crisis, the amount of people filing for unemployment benefits has always been greater than the number of jobs lost in the US economy. This is what we expected as the NFP do not include a little portion of US employees. If you add the number of jobs lost in the agricultural industry in addition to the local government, private household and non-profit employees, you will certainly reconcile the two figures (i.e. number of total jobs lost = continued jobless claims).

Figure 2

FI2

Source: Eikon Reuters

It is difficult to infer a level of unemployment rate from the jobless claims data, but we just know that the level will be elevated in the coming months. Some economists have forecasted a 10% unemployment this summer, but we think it could actually reach 20 percent as the uncertainty around employees’ status will surge to historical highs. US households will start to save more as most of the companies are now very vulnerable to the demand shock, which would in theory be deflationary (at first).

Even though the chart is far from being perfect (figure 3), we like to look at the 3-year returns in stocks (in order to smoothen the volatility in equities) as a leading 1-year leading indicator of unemployment. Sharp and sustain selloffs in equities are usually associated with rising unemployment as equities’ valuations directly reflect the level of consumer sentiment in the market.

Figure 3

FI3

Source: Eikon Reuters

What could wake up the Dollar (from its coma)?

The coming week will be quite busy in terms of events and economic reports, with the FOMC meeting and the Euro area flash CPI reading on Wednesday, the NFP report on Friday and some Q1 GDP first estimates (UK on Tuesday, Spain and US on Wednesday).

As we said in our previous research (see below, at the end of the article), the 80 level has acted like a resistance for the past few weeks and the US Dollar index is now trading at 79.70 (it recovered a bit from its overnight losses after it fell down to 79.55 during the Asian session). We believe that the market is now waiting for some ‘action’ after all these policymakers’ talks; the next move should come from BoJ and/or ECB officials within the next couple of months according to economists, where both of the central banks target to increase the money supply by applying some unconventional monetary policies.

Technicals on USD index: If we have a quick look at the chart below, we can see that the upper and lower bands (Green lines) of the Bollinger Bands Indicator (20 days, 2-sigma) have acted like dynamic resistance and support for the past couple of weeks. The USD index has been trading below its 20-daily SMA (red line) since the beginning of the month (April 8th) and seems on its way to re-test its strong support area at 79.25-79.30 (which is considered as a good buying opportunity). The resistance zone on the topside stands at 80.45 – 80.60.

USDindex-28-avr

(Source: Reuters)

The question we are asking myself at the moment is: Will the $10bn cut in the QE program in addition of a strong NFP report be enough to rebuild confidence in the US Dollar this week?

Firstly, economic data in the US have showed some improvements (retail sales, ISM Mfg PMI, U. of Michigan confidence and Pending Home sales all came in higher than expected this month); therefore we think that the market has already priced in a $10bn cut from the Fed officials and this meeting could be a non-event. The Fed’s balance sheet will continue to expand for the five coming months at least and the Fed Funds rate will remain at a historical low for another year, pushing preferences for the British pound and the single currency at the moment.

However, a strong NFP report on Friday (expected to come in a 210K) could potentially push the US yields back to levels we saw in March and bring traders’ interest to the US Dollar. The 10-year US yield has been oscillating mainly between 2.60% and 2.80% since the beginning of February and is currently trading at 2.6750%. We think that a print above 200K (helped with a low EZ inflation on Wednesday) could bring the US Dollar index above the 80.00 level. The unemployment on its side is expected to edge down by 0.1% to 6.6% and approach its ‘once-to-be’ forward guidance threshold, but won’t have an important impact as Fed’s officials have switched to a qualitative guidance and will take into account a wider range of economic variables according to Yellen’s first monetary policy speech at the Economic Club of New York.

Article wrote on April 16, 2014 (see graph):

The Ukrainian crisis in addition to the on-going Chinese economic slowdown episode haven’t trigged risk-off sentiment yet. The US Dollar strengthened against the Dollar-bloc currencies (see our last article What’s next for the Dollar-Bloc currencies) and the yen, but remains weak against the Euro and the British pound. We saw that fundamentals in the US continued to expand this week, with industrial production and retail sales both coming in better-than-expected. The only disappointment was the housing starts and Permits data that grew 946K and 990K in March (vs 973K and 1,008K expected).

This evening, new Fed chair Janet Yellen emphasized the importance of the ‘qualitative guidance’ during her first monetary policy speech at the Economic Club of New York, a new guidance that ‘relies on wide range of information’. She sounded quite confident on the outlook of the US economy; however, she mentioned that ‘the goal has not been achieved at this point’. In our opinion, she eased early rate hike speculation, and the 2-year US yield is now trading at 37.5bps, 10 bps lower compare to last week’s high.

Hence, we are trying to figure out if tomorrow’s initial claims report is going to be an non-event based on what we have read and heard from US policymakers, or could a good print boost the value of the US Dollar? Last week, according to the Labour Department, the number of Americans filing new applications for unemployment benefits fell to a 7-year low of 300K (seasonally adjusted, smashing expectations of 320K), signalling a strengthening economy after the ‘weather episode’. However, it didn’t have a major impact on the financial markets and on the US Dollar. Therefore, with tomorrow’s claims expected to edge up by 15K to 315K, we don’t see any significant move from the greenback coming from that macroeconomic indicator.

Quick review on the US Dollar index: As you can see in on the chart below, the US Dollar index eventually found support slightly above 79.30 last Thursday, but it seems that the 79.85 – 79.90 is causing a problem. Low volatility combined with preferences for the Euro and the Sterling have enabled the US Dollar index to reach the psychological 80.00 level. We still remain bullish on the US Dollar in the medium (against most of the currencies), but we think some updates on BoJ stimulus combined with more ECB jawboning remarks on the Euro strength will help the US Dollar to climb above 80.00.

USDindex

(Source: Reuters)

Quick weekly review ahead of the Non-Farm Payrolls…

After tensions eased in Ukraine and China in the beginning of the week, risk appetite was back with AUDJPY up 4% since its low reached on Monday at 90.00. It helped the stock market recovered, with S&P500 and Eurostoxx 50 up by 2.5% and 3%.

Australian fundamentals also surprised traders: Q4 2013 GDP printed above consensus at 0.8% QoQ (vs 0.7% expected), January Trade Balance came in at 1.43bn AUD smashing expectations of 270mio AUD (exports went up 3.7% while imports rose 0.82%) and retail sales surged to 1.2% MoM in January (vs. 0.5% estimates) from a revised 0.7%. The pair broke its 100-day MA at 0.9080 to trade at 0.9112 in the late afternoon before coming back below the 0.9100 level. On the Asian side, the Yen dropped to a five-week low against the greenback (up 1.8% to reach a high of 103.16) after GPIF (world’s largest holder of JGBs) advisory panel announced that the fund ‘doesn’t need a domestic bond focus’ given quickening inflation.

As expected, the Bank of England kept its Official Bank rate steady at its record low of 0.5% (five years now) in order to help the UK economy on to a full recovery (UK grew by 1.8% in 2013, fastest pace in 6 year). Policymakers also announced that the central will reinvest GBP 8.2bn on a bond that it bought in its QE operations that was set to mature on March 14. As you can see it on the chart below (30-min period), Cable eased after the announcement until it found support at around 1.6685, then the pair surged for the rest of the (London) trading session. The gains were capped slightly above its ST resistance at 1.6760 and GBPUSD is now back in its 1.6660 – 1.6760 range. Poor US data tomorrow could bring the pair back above the 1.6800 level; the strong resistance on the topside stands at 1.6825 (Feb 17th high).

(Source: Reuters)

The big mover today was the Euro of course as Draghi ‘disappointed’ the market. He left the refi rate unchanged at 0.25% and gave a quite optimistic conference in the afternoon, which we believe pushed the single currency above the 1.3800 level against the greenback (EURUSD rose 120 pips approx. during the press conference to 1.3850). According to the ECB, the unemployment is stabilizing and the downside inflation risks ‘remain limited’. Policymakers also raised their growth forecast for the Euro area by 0.1% to 1.2% for the year 2014 and are expecting a 1.8% inflation rate in 2016 (still concerned about the inflation rate for 2014, revised lower to 1.0%).

Having said that, we are now wondering if we could see a turning point tomorrow ahead of (or straight after) the US employment data. Yesterday, ADP reported that the US private employers added ‘only’ 139K jobs in February (vs. 160K expected) with January’s print revised lower to 125K (from 175K), and we saw that non-manufacturing PMI fell to a four-year low to 51.6 (from 54.0 in January and vs 53.0 cons.) with the employment index contracting for the first time in two years (from 56.4 to 47.5). we saw this chart (below) yesterday in a research which we find interesting; it shows the employment index (in orange) from the ISM non-mfg survey overlaid with the NFP data (in purple). Some economists already revised down their estimates for tomorrow even if 150K (market’s expectations) is a disappointing figure for the US economy.  A weaker-than-expected figure will definitely reverse the trend on USDJPY and could potentially impact this week’s ‘market effort’.

(Source: Reuters)