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US Inflation, Labor Market Klaxons Sound Warning Signals

Matt Eidinger December 10, 2020

Cracks in consumer inflation coupled with renewed labor market pains did little to alleviate the downward pressure weighing on the US dollar this morning. In the minutes after 8:30, the “big dollar” weakened about 20 bps against its northern peer, the Canadian dollar.

The US dollar was also 0.21% weaker on a trade-weighted basis, according to the DXY index, although the index has found some support around the 91-point mark in recent days.

According to the first report from the Bureau of Labor Statistics, core consumer inflation advanced 0.2% in November and at an annualized rate of 1.6%, meeting market expectations, but well below pre-COVID trend levels just above 2%.

Beneath the headline figures, gains were apparent in airline fares (+3.5%) and transportation services (+1.1%), although spending on both has not nearly recovered to pre-pandemic levels. The shelter index was 1.9% higher on a yearly basis but continues to remain flat over the past few months – at least in part reflecting a moratorium on evictions.

Consumer spending on apparel rose – perhaps induced by holiday shopping last month – for the first time in several months (+0.9%). Still, the effects of the pandemic can be felt when examining the energy index, which remains 9.4% lower than this time last year.

Although at-home energy use such as electricity and gas utilities are up, spending on fuel usage and energy commodities remain roughly 20% lower year-over-year.

Separately, the US Department of Labor reported an explosive rise to 853,000 new weekly claims for unemployment insurance last week – the highest levels in over two months and the largest weekly increase since August. Economists had expected an increase of 725,000.

As the rate of new coronavirus infections averages more than 200,000 per day across the country, preliminary data indicates sharp increases in filings across the populous states of California, Illinois, New York and Texas.

Indeed, a massive statewide stay-at-home order implemented across much of California – including forced closures of restaurants, gyms and other high touch service businesses – will likely lead to another large spike in next week’s statistics as well.

The figures for continuing jobless claims moved in the wrong direction as well – rising over 200,000 to 5.75 million during the week ending November 28. Combined with the number of Americans receiving either extended benefits or pandemic related assistance, the figures total 19 million.

Accordingly, the data paint a less-than-rosy picture of the labor market that echoes the notion of a stalled economic recovery amidst rising coronavirus infections and a lack of fiscal support.

However, today’s economic data releases occur within what’s been an optimistic week for financial markets and the world in general.

The approvals, pending approvals and – in some nations – actual rollouts of the Pfizer/BioNTech coronavirus vaccine have propped up hopes of a return to some semblance of normalcy in the coming months. Separately, congressional leadership in the US has been inching closer to a $908 billion dollar stimulus bill that would include additional benefits for displaced workers.

Whether additional fiscal support and mass vaccinations can arrive as a holiday miracles, remains to be seen, however.

Matthew Eidinger

Market Strategist & Fintech Specialist