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USD surged on mixed NFP report but fades on Powell comments

calendar 05/09/2020 - 18:48 UTC

The Aug NFP report shows that the number of pandemic unemployed persons dropped for the 4-consecutive months as the pack of corona lockdown may be already over in Apr’20; till now, Aug unemployment is the lowest. The change in total NFP employment for June-July was revised down by 39K than previously reported. But there is continuing suspense over the definition of pandemic/temporary unemployment.

As usual, for the last few months, the BLS estimated around +0.7% margin of error (maximum) for this ‘misclassified’ pandemic headline unemployment number in Aug also. But this margin of error also reduced from an earlier +1%. So the effective U.S. unemployment rate in Aug could be anywhere between 8.4-8.1% as per BLS’s own admission.

Actually, there is some confusion over the huge discrepancy between continuing jobless/state unemployment claims, PUA, and that of the nominal number of unemployed persons being reported by the BLS. There must be some reconciliation differences or even frauds (to pocket the attractive PUA compensation). In any way, if the average of the above three figures (BLS unemployment number, continuing jobless and PUA claims) is taken into consideration along with the temporary census workers in Aug, the effective unemployment rate for Aug maybe around 8.8% instead of the BLS reported figure of 8.4%.

In any way, the headline upbeat unemployment number of 8.4% was also offset by higher permanent job losses, which jumped by over 0.5M to 3.4M, the highest since 2013. And the percentage of the labor force unemployed for more than 15 weeks jumped to 5.1%, the highest since the 2008 GFC days. This points to the uneven economic recovery pertaining to mini-lockdowns, social unrest (riots), political & corona uncertainty, ongoing business closures, subdued capex/business investments, and also bankruptcies despite the huge Fed lending program. Main Street now needs grants rather than loans to survive.

But the lingering political drama over corona stimulus 4.0 may be an indication that the much-awaited PUA extension may not happen before the Nov election as Pelosi is not ready to approve Trump’s proposal of $300 and $100 (from the state); total $400/w from the earlier $600/w. And without Congress approval, the U.S. Treasury/White House (Trump) can’t spend any single additional cent. Trump is blaming Democrats for the failure of PUA extension in a reduced amount, while Pelosi is not ready to compromise on this ahead of the Nov election. This is just a political game.

The USD got some boost, Dow and Gold slip as the lower unemployment rate may force the Fed to prepare the market for the eventual tapering (exit) earlier than expected. The Fed, under new policy rejig, will now target the 4% unemployment rate more rather than the average inflation of 2%. Powell clearly said the Fed will gradually taper its unprecedented pandemic QQE if it was confident that the unemployment rate will fall towards 4% levels on a sustainable basis. The Fed mandate is maximum employment ensuring price stability around 2% inflation levels (core PCE).

But on late Friday, Dow got some boost, USD edged down from the session high, while Gold surged around the daily low after Powell assured the ZIRP regime till at least 2021 as the U.S. economic recovery is still fragile. Powell said in an interview on an apparent slowing economic recovery that although it’s continuing, going forward it may be harder.

On his part, Trump tweeted soon after the NFP job data and an unexpected fall in the headline unemployment rate: Great Jobs Numbers! 1.37 Million Jobs Added In August. Unemployment Rate Falls To 8.4% (Wow, much better than expected!). Broke the 10% level faster and deeper than thought possible.

The White House CEA also published an optimistic note over the dramatic fall in the unemployment rate.

Bottom line:

The economic recovery is now dependent on the COVID-19 vaccinations (hopefully by H1-2021), subsequently expected herd immunity and at least 75% economic recovery by 2022 (for the lost GDP). Thus, before 2022, the U.S. unemployment rate may not fall below 4% meaningfully. But if there are clear signs of employment/economic recovery, the Fed may prepare the market for the eventual pandemic QQE tapering from Q4-2021 and may also start gradual hiking from H1-2022 to prepare itself for the next economic crisis, usually every 10-12 years of economic (boom/bust) cycle. As the financial market always discounts the future, the gradual Fed exit after 2021 would be positive for USD and negative for Gold and Dow.

The U.S. NFP report (Aug) is mixed at a glance:


There are still around 11.54M persons unemployed due to COVID-19:



Almost 86% of pandemic unemployment is from the service industry, mainly private as the U.S. is a service-oriented economy rather than manufacturing:







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