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US Labor Data Make a “U” Turn

Matt Eidinger December 12, 2019

The US labor market lost some of its shine this morning – at least according to key labor market data and producer inflation numbers.

According to the US Department of Labor (DOL), initial jobless claims – a leading economic indicator – rose to the highest levels in over two years to 253,000 last week. The rise in unemployment insurance claims was driven by layoffs in manufacturing that were not concentrated in any particular state.

Economists had expected initial jobless claims of 212,000.

The four-week moving average, which is far less volatile and more reliable, rose last week to 224,000.

In contrast, continuing claims fell 31,000 to 1,667,000 and remain at a multi-decade low.

Separately, the Bureau of Labor Statistics (BLS) reported the Producer Price Index (PPI) was flat last month – missing market expectations looking for a 0.1% rise. Year over year, PPI rose 1.1% – also missing the mark set at 1.3%.

The gains were driven by rising meat and energy prices, while price retreats materialized in food and energy sub-categories, as well as chemicals and jewelry.

Stripping out the volatile food and energy components, producer inflation moved up 1.3% compared to this time last year – also lower than expected.

FX markets are still digesting yesterday’s US Federal Reserve decision and accompanying press release. Yesterday, the USD/CAD spot rate barely reacted to the already widely anticipated pause on interest rate cuts that was announced, having already lost much steam throughout the morning.

Today was much of the same – the dollar was stagnant near a one-week low against the loonie. Similarly, the trade-weighted dollar index has moved down 0.3% for the week to 97.13.

Amid strong labor market conditions and a resilient consumer, but slower-than-expected inflation figures and lingering trade concerns, the US Federal Reserve paused on interest rate cuts yesterday afternoon and signaled the same logic could prevail in 2020. According to data from the CME Group, money markets agree with this assessment and are only pricing in one more quarter point cut to interest rates in 2020 that will come in the summer at the earliest.

This morning’s data appears to vindicate the US Federal Reserve’s decision to cut interest rates three times and then pause. Essentially, the US economy remains near full employment and modest swings up and down in initial claims should be expected. Furthermore, although producer inflation disappointed, next week’s PCE index is the primary measure used by the Fed to gauge price stability.

Finally, the recent delay of new Chinese tariffs and the signing of USMCA have raised confidence in the ability of the Fed to find a balanced position between price stability and sustained economic growth in the environment of trade instability.

Matthew Eidinger
Fintech Specialist, Dealing Operations

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