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Weak US Jobless Claims Data Point to Possible Tragedy in Recovery’s Final Act

Matt Eidinger December 17, 2020

A sharp spike in initial claims for unemployment insurance reported by the US Department of Labor this morning prompted little reaction in foreign exchange markets, which seem to have traded fears about COVID-19 infections for vaccine-mania this week.

After gaining 50 points yesterday afternoon after the Federal Reserve decision, the greenback softened 50 bps against the Canadian dollar overnight and has remained at those levels this morning. On a trade-weighted basis, the US dollar index (DXY) sunk 0.66% – moving to a two year low of 89.84 but holding steady in the minutes after 8:30 am EST.

According to the US Department of Labor, there were 885,000 new filings for unemployment insurance last week – 23,000 more than the week ending December 5 and over 80,000 more than markets were hoping for. Preliminary data for last week indicates that California and Illinois were the states with the most claims, reporting 24,000 and 35,000, respectively.

Also in the report, continuing claims for unemployment insurance continued to fall during the most recent week with available data – that which ended on December 5. During this time, 5.5 million Americans were receiving regular state unemployment benefits. However, continuing claims for pandemic-related benefits rose more than 1.6 million by the end of November – possibly due to the effects of earlier lockdowns.

For the past few weeks, there has been mounting pressure on American congressional leadership to agree to a new economic stimulus bill before key benefits for displaced workers expire after Christmas day.

Failure to do so could leave millions of Americans without the financial means to support themselves through the holiday season and could deliver a crippling blow to the economic recovery just at the moment when mass vaccinations are beginning to turn the tide.

If this week’s sharp decline in retail sales are a reliable indicator of the health of the American consumer, they could mark the first act in a long Shakespearean history play that ends with a twist of tragedy, with today’s weak jobless claims report providing another disturbing twist in the plot.

Across the pond, the Bank of England’s Monetary Policy Committee voted unanimously to maintain the bank rate at 0.1% and keep asset purchases at £895 billion. “Cable,” which is how currency traders sometimes refer to the GBP/USD pair, rose modestly in advance of the release, but quickly fell to previous levels shortly thereafter.

While the central bank was optimistic about the impact COVID-19 vaccinations would have on public health and the economy, it remained cognizant of the downside risks that will continue for the island nation in 2021 as a result of the lingering structural changes to the economy brought about by coronavirus.

Surprisingly, the imminent “Brexit” from the European Union was only mentioned a handful of times in the report. At all times, the consensus view was a weaker pound and lower economic growth in 2021, in the event of a no-deal departure from the single market and customs union.

Matthew Eidinger

Market Strategist & Fintech Specialist