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Market Wire:
Jobless Claims Rise, Suggesting Economy Is Losing Momentum

Karl Schamotta June 13, 2019

The number of Americans submitting initial claims for unemployment benefits rose faster-than-expected last week, adding to Friday’s disappointing payrolls report in suggesting that the economy is entering a slowdown.

Numbers released by the Department of Labor this morning show that 220,000 people filed applications for unemployment benefits last week, and the four-week moving average rose to 217,750 – up 2,500 from the prior week. The four-week moving average number of people receiving benefits after an initial week – continuing claims – rose 7,750 to 1.68 million.

Friday’s payrolls report showed that 75,000 jobs were created in May – well below expectations for 180,000. Numbers for March and April were also revised lower, suggesting that employment growth began weakening before the latest escalation in US-China trade tensions.

Manufacturing production, home sales, exports, and consumer spending have all cooled in recent months, and yesterday’s inflation report helped to illustrate an economy that is losing momentum without generating upward pressure on prices.

Odds on two rate cuts by the end of September now exceed the probabilities assigned to a single move – an unusual circumstance which underlines the conviction market participants have in a swift and significant reaction from the Federal Reserve.

Narrowing interest differentials are dragging the dollar lower on a trade-weighted basis as we go to pixels, but safe-haven flows are also helping to support the currency against risk-sensitive units elsewhere.

Front-month oil prices jumped off a five-month low overnight after two tankers were attacked near the Strait of Hormuz – one with what is believed to have been a torpedo. Prices had fallen almost four percent yesterday, after an unexpectedly-large rise in American crude inventories weakened the global demand outlook.

The incident comes amid heightened tensions between the United States and Iran – but, as a commentator from Bloomberg observed this morning, there is little that Tehran might gain from this action – meaning that a smaller regional actor may be involved.

With both Brent and West Texas flavours up several percentage points, the Canadian dollar has reversed yesterday’s losses, rising slightly against its southern counterpart.

Bottom Line: Employment conditions in the US labour market remain historically strong – but evidence of an economic slowdown continues to accumulate, bolstering the case for renewed monetary accommodation from the Federal Reserve. With a narrowing in interest rate differentials underway, the dollar looks set to struggle – at least until the first rate cut is formalized.

Karl Schamotta
Chief Market Strategist

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