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Currency Markets Convulse After Disappointing North American Job Reports

by Karl Schamotta | May 7, 2021

What happened: Defying far more optimistic predictions, the United States created only 266,000 jobs last month – suggesting that pandemic-related distortions continue to complicate the economic recovery. An easing in social distancing restrictions helped bring 331,000 jobs back in the leisure and hospitality sector, and other services added 44,000 roles. But 77,000 positions were shed in transportation and warehousing, and manufacturers laid off more than 18,000 workers. Retail sector employment shrank by 15,000.

The gain previously reported for March was revised down, from 916,000 to 770,000 jobs.

The unemployment rate inched up to 6.1 percent, and the number of unemployed, at 9.8 million, stayed nearly flat. A broader measure that includes unemployed, underemployed, and discouraged workers – the U-6 rate – dropped from 10.7 percent to 10.4 percent.

Average hourly earnings rose 0.7 percent month-over-month, with compositional changes driving much of the change.

Overall payrolls remain 5.4 percent below pre-pandemic levels. At 57.9 percent, the employment-to-population ratio is still below the 58.2 percent level reached during the worst months after the 2008 Global Financial Crisis.

Beyond the numbers: A variety of issues may be restraining employment growth, including: persistent health concerns, vaccine hesitancy, childcare shortages, and jobless benefits that rival or exceed paid employment. Although today’s numbers will be seized upon to advance the agendas of various interest groups and political opponents, it is simply too early to know how supply and demand factors are really influencing the employment market.

Market reaction was violent:  US government bond yields crashed through the 1.5 percent mark and the dollar dropped to a two-month low – a response exacerbated by the profound upgrade in expectations that occurred ahead of the release. Official consensus forecasts were set around the 1 million mark on Monday, but Wall Street banks competed in raising forecasts over the last few days, with Citibank anticipating more than 1.15 million jobs gained, Morgan Stanley looking for 1.25, and Goldman Sachs expecting 1.3.

The doves are back: Markets are pushing monetary tightening projections out, with the Federal Reserve now expected to begin dropping asset purchase taper hints in July – or at the Jackson Hole conference in August.

North of the border: Canada shed 207,000 jobs in April – missing expectations for a 150,000-position loss – as renewed social distancing measures squeezed the critical food, accommodation and retail sectors in Ontario and British Columbia. The country’s unemployment rate rose from 7.5 percent to 8.1 percent, with overall payrolls now roughly 500,000 below pre-pandemic levels.

The loonie wasn’t swayed: A brief spike in volatility after the twin releases saw the Canadian dollar gain almost 40 basis points, but the effect has now faded. Investors broadly expect the country’s vaccination campaign to continue accelerating, enabling the gradual lifting of coronavirus restrictions in the coming months – and the employment market is thought likely to make a full recovery as this process unfolds. Projections for a 2022 rate hike from the Bank of Canada remain largely intact.

The big picture: The road to a full employment recovery in North America remains long and perilous, and today’s setback is likely to reinforce a sense of caution across the market landscape – something that should, all else being equal, set the stage for renewed weakness in the dollar.

Karl Schamotta
Chief Market Strategist

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