Dollar Strengthening after Solid U.S. Employment Report

August 6, 2021

The DXY weighted dollar index advanced 0.4% overnight but, at 92.58, remains well inside its 52-week range of 89.21 – 94.74. The dollar’s overnight advance has been broadly spread, with gains of at least 0.3% against the euro, yen, Aussie dollar, Swiss franc and sterling.

The U.S. July employment situation improved more rapidly than anticipated, encouraging speculation that Fed tapering will begin sooner and transpire more quickly than monetary officials have been implying. Non-farm payroll jobs jumped 943k last month, and employment rises in May-June was revised 119k higher. That puts the July level of jobs 192k above what analysts were assuming and 16.7 million above the April 2020 low. Two-thirds of July’s incremental jobs growth involved the leisure & hospitality and education sectors. Moreover, the unemployment rate dropped 0.3 percentage points to 5.4%, a 16-month low. Labor market participation and the jobs-to-population ratios each increased, and the broader unemployment plus under-employment U6 rate fell 0.6 percentage points on month and by a full percentage point over the past two months to 9.2%. All this was accompanied by an acceleration of average hourly earnings growth to 4.0% and news that 9.2 million job openings remain unfilled.

U.S. equities and sovereign debt yields have risen. The DOW and S&P 500 indices rose 0.4% and 0.6% within ten minutes of their open, but the interest rate-sensitive Nasdaq dipped 0.1%. The ten-year U.S. Treasury yield jumped six basis points, while comparable sovereign debt yields advanced today by seven basis points in the U.K. and four basis points in Germany, France, Italy and the Netherlands. Earlier, Asian equities closed Friday with only small net changes.

Among commodity prices, gold sports a 2.0% decline, while WTI oil has risen 0.4%.

Canada also reported improved labor market statistics for the month of July that included a 0.3 percentage point drop in the jobless rate to 7.5%, the creation of 94.6k new jobs but unchanged labor market participation and on-year growth in average hourly wages of just 0.7%.

Several countries released industrial production figures this Friday.

  • The biggest disappointment came from an unexpected monthly 1.3% June drop in Germany, led by decreases of 2.6% in construction, 2.9% in capital goods, and 0.9% in intermediate goods. The 5.1% 12-month rate of increase in German industrial production was down from 16.6% in May and 27.6% in April, and production has now fallen on month three straight times and in five of the last six reported months.
  • Spanish industrial production also dropped in June (1.0%), trimming the year-on-year advance to 11.1% from 25.0% in May and 48.6% in April.
  • Italian industrial production climbed 1.0% in June and by 13.9% from its year-earlier level.
  • Danish industrial production fell for the second time in three months, losing 2.3% and trimming its 12-month rate of rise to 6.8%.
  • Czech industrial output grew 1.0% on month and by 11.4% from June 2020.
  • Hungarian industrial production, which had recorded on-year advances of more than 55.0% in both April and May, was 22% higher in June than a year earlier.

Released Japanese data today featured a 3.2% drop in real personal spending during June on top of a 2.1% slide in May. Household spending swung to a 5.1% year-on-year decline from increases of 11.6% in May and 13.0% in April. The year-on-year change in average labor cash earnings swung from rises in March, April and May of 0.6%, 01.4% and 1.9% to a dip of 0.1% in June. The index of leading economic indicators rose 1.5 points in June to an 88-month high, and the index of coincident economic indicators in Japan earned a trend designation by officials of “improving” for a fourth straight month after rising 1.9 points to its best level in 17 months. Finally, Japanese international reserves rebounded $10.0 billion last month after dropping $11.0 billion in June.

Australia’s AIG-compiled service-sector purchasing managers index slumped 6.1 points to a 10-month low of 51.7. Simultaneously, the published quarterly Monetary Policy Statement of the Reserve Bank of Australia expressed considerable concern over the feared Delta Variant and predicted that real GDP in the third quarter of 2021 will contract.

The British Halifax house price index posted the smallest 12-month increase (7.6% in July) in four months.

Cypriot consumer price inflation rose 0.9 percentage points to a 121-month high of 4.0% in July.

France’s current account deficit of EUR 508 million in June was its smallest size since the last month of 2019.

On-year growth in Mexican private business investment of 46.5% in May was the most ever but measured against a pandemic-depleted year-earlier level.

The National Bank of Romania‘s policy rate, which had been cut most recently by 25 basis points in January, was left unchanged at 1.25% after this week’s review. Previous reductions in 2020 had totaled 100 basis points. Monetary authorities project inflation well above the 1.5-3.5% target range over coming months. The 12-month increase in the CPI of 3.94% in June was the most in a year and a half and nearly twice that of 2.1% at end-2020. Officials promised to keep a tight rein on domestic financial liquidity to ensure that the spike in inflation doesn’t endure.

A separate monetary policy review at the Reserve Bank of India resulted in no change being made to the 4.0% repo rate or the 3.35% reverse repo rate. The rates haven’t been changed in 2021 but were cut in March and May of 2020 by a total of 115 basis points. The central bank’s inflation forecast for this fiscal year was revised upward by 0.6 percentage points to 5.7%.

Aggregate demand is improving, but the underlying conditions are still weak. Aggregate supply is also lagging below pre-pandemic levels. While several steps have been taken to ease supply constraints, more needs to be done to restore supply-demand balance in a number of sectors of the economy. The recent inflationary pressures are evoking concerns; but the current assessment is that these pressures are transitory and largely driven by adverse supply side factors. We are in the midst of an extraordinary situation arising from the pandemic. The conduct of monetary policy during the pandemic has been geared to maintain congenial financial conditions that nurture and rejuvenate growth. At this stage, therefore, continued policy support from all sides – fiscal, monetary and sectoral – is required to nurture the nascent and hesitant recovery.

For the first day in several months, there was a six-figure increase in newly reported U.S. covid-19 infections on Thursday. While today’s labor market report was certainly welcome, the upsurge in the pandemic and the pathological reluctance of many anti-vaxxers to take their chances against this lethal disease rather than get a vaccine proven to be highly effective casts great doubt over the U.S. and world economic outlook.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

Tags: , , , ,


Comments are closed.