Non-Farm Payrolls Preview: Ongoing recovery not enough to save the dollar

The new month brings the customary release on the first Friday of the month and will show investors if the number of new posts last month has extended a rebound that started in May as lockdowns eased. The US has added almost 9.3 million jobs between then and July as businesses have endeavoured to get back to normal, with those gains meaning roughly 42% of the 22.2 million jobs lost in March and April have so far been clawed back.

Faltering recovery

August’s headline figure is expected to show 1.5 million jobs were added, down slightly from July’s 1.76 million print, with the unemployment rate nudging down from 10.2% to 9.9%. The July data marked the third consecutive month of positive headline gains after crashing in April due to the pandemic shutdowns. However, the US economic recovery continues to waver as applications for unemployment benefits have increased each week, as seen in the higher frequency initial jobless claims figures. Last week’s 1.1 million print shows a recent stalling in the improvement as claims have only dipped below the 1 million mark once in 22 weeks. To put this into perspective, these job losses continue at levels worse than any week in the GFC over a decade ago. The layoffs also remain widespread.

Continuing claims, that is the unemployed actively collecting state jobless aid, has eased for four straight weeks, although again this figure remains historically high at 14.5 million compared with 6.6 million during the 2008-2009 crisis. At least the so-called insured unemployment rate, which is considered an alternative measure of joblessness fell below 10% for the first time since April.

Most recently, the employment component within the ISM released this week still looks subdued with it remaining in contraction territory, although it does point to a slower pace of layoffs than the previous month. The sluggish nature of the employment data is in keeping with businesses who remain cautious and are reluctant to expand capacity given the persistent pandemic uncertainty. Recent lockdown measures seen in Florida, Texas and California, which account for 25% of total US employment, will hit the current healing of the labour market and may show up in this month’s report.

Fiscal wrangling

Of course, the further and longer the US remains from full employment, the more structural damage the economy will sustain, and this is not being helped by the expiry of the Paycheck Protection Program amid the Washington stand-off over further economic stimulus. Even though President Trump has signed off on extending jobless benefits, unemployment aid will be at a lower level and the timing of the aid remains uncertain.

So it is the pace of the declining claims which is likely concerning the Fed, who has continuously portrayed a gloomy outlook for the domestic economy. With its policy shift last week, going forward the Fed will have greater scope to allow higher levels of employment, with an implicit bias to respond to weaker levels of employment and keep policy looser when there is high employment, like just before the Covid shock. Markets are expecting more information on the implementation strategy of the Framework review at the FOMC meeting on 16 September.

Dollar doldrums

With the dollar on a weak footing since the Fed’s statement, only a blockbuster headline number will slow the greenback’s descent. Key for strong gains will be the continued effort to recall furloughed workers through reopening plans that have only been partly hampered by increasing virus cases. Even then, Friday’s data is backward looking so it seems anything less positive may just add more fuel to the dollar selling as it would cement the lower-for-longer interest rate outlook and the unappealing USD attractiveness.