Analysts’ Pick: Will the dollar decline amid weaker employment data in the US
- We expect today’s initial jobless claims to rise above last week’s 3.28mn as more US states went into lockdown for the week ended March 20th
- NonFarm Payrolls should mirror ADP’s report, but will likely be skewed higher as temporary jobs in the healthcare and public sector likely to inflate the numbers
- Our outlook for the dollar continues to be skewed to the downside in the short-term before a rebound into a smooth uptrend
We expect employment data in the US to continue to show weakness in initial jobless claims and in the US Bureau of Labour Statistics (BLS) jobs report for March.
The most up-to-date statistic of the current landscape of the labour market in the US will be today's initial jobless claims. ADP's private employment report has already confirmed our expectations that smaller businesses will suffer the most. The report also signalled that employment in transportation, utilities and trade are suffering, which was probably a result of the lockdown across multiple states. The education & healthcare sector added the most workers for March, likely to keep up with the pressure on healthcare workers amid the growing number of cases of the coronavirus in the US.
Employment in smaller firms contracted the most in the private sector
ISM's manufacturing PMI report for March that was released earlier this week on Wednesday also failed to paint a positive outlook for the US. The headline index only lost one percentage point to 49.1 in March, boosted mostly by slower supplier deliveries. While normally a positive indicator of the economy since slower supplier deliveries typically mean higher demand in a robust economy, this month’s slower supplier deliveries is more likely the result of a disruption to the global supply chain as workers in China only just started to return to their jobs in March while the rest of the world moves into lockdown.
Slower supplier deliveries was the only driver of March’s Manufacturing PMI
The more concerning sub-indices in the PMI report were prices, new orders and employment. Prices started to decline in March, most notably driven down by metals and energy prices. New orders contracted 7.6 percentage points to 42.2 in March, the lowest since March 2009. Fabricated metal products, transportation equipment and petroleum & coal products contracted the most in the sector. Among the six big industry sectors, 71% of participants in the PMI report signalled either a hiring freeze or a head-count reduction. These three sub-indices signal that employment over the next few weeks will likely be affected even more as the outlook for most businesses will be skewed to the downside with declining new orders and falling prices. This will be amplified with the lockdown in the US, whose economy is reliant on domestic demand as well. As a result, April's employment reports and the next few weeks of initial jobless claims is likely to continue to show weakness especially as the employment data in March has barely reflected the impact of the virus yet.
Manufacturing PMI new orders and prices sub-indices signal that April’s employment will probably deteriorate more
Initial jobless claims for the week ended March 20th surged to a record high of 3.28mn. We expect claims for the week ended March 27th to hit much higher, as more states in the US were added to the list of states on lockdown. Pennsylvania had the greatest number of claims for the week ended March 21st, after the state lowered requirements for workers to apply for the unemployment benefit. Expect more states to do the same, inflating the number of claims by a large margin. Economists also expects claims to shoot higher, with a median forecast of a growth of 3.7mn claims.
Bloomberg’s survey shows the median consensus for initial jobless claims at 3.7mn for the week ended March 21st
Then on Friday, the BLS' employment report should come in better-than-expected for March, as the impact of the coronavirus will not be fully reflected in March's report. For the month of March, the BLS' report only recognises unemployment as workers who were not paid for work after March 12th. This means that employees that were paid for a few hours up to March 10th or 11th would still be considered as employed for the month. As workers in the US can get paid monthly, bi-weekly, weekly or daily, the data will likely be skewed to the higher side since unemployment rose the most during the week ended March 20th, not the week before that.
The surge in the number of cases in the US came only after March 12th
In addition, ADP's private employment report signalled that payrolls grew in the healthcare and education sectors. We expect this to be reflected in the BLS report as well, skewing NonFarm payrolls higher as the numbers should show more temporary jobs in the public sector to help with unemployment as well as increased hiring in the healthcare sector to deal with the coronavirus outbreak. As a result, change in NonFarm payrolls should fall less than the expected 100,000 decline.
The dollar should continue to fall later today, as the initial jobless claims dataset should be worse than expected but not largely surprise investors. The Fed's temporary new lending program for small and medium-sized US companies will likely be more impactful as it is anticipated to be rolled out in the next few weeks. The Dollar Index looks likely to retest 99.46's level as a result and possibly break the support to fall towards 98.82.
Then on Friday, NonFarm Payrolls should have little effect on the greenback as investors likely do not expect the employment report to fully reflect the impact of the coronavirus outbreak. DXY should remain little changed on the release of the report as a result.
The bulls and bears are in a close fight for the Dollar Index. Fundamentally, the demand for the greenback has faded as both the US government and central flood the market with cash to prevent a liquidity crunch amid the coronavirus outbreak and lockdowns across multiple states. Technically, the trend for the greenback has reversed, falling to range between the 61.8% and 50& Fibonacci retracement band. With the outlook for the dollar generally tilted towards the upside as a result of both demand for cash and its safe haven properties, we do see the dollar on a smoother-than-before uptrend in the medium-term. But in the short term we see the dollar moving downwards nearer the 50% Fibonacci retracement level before a rebound. Bears will likely try break the weak support of 99.46 and push the index lower before the bulls regain momentum at the 98.82 as market makers shift back into the dollar.
Support: 99.46 / 98.82 / 98.29
Resistance: 99.80 / 100.00 / 100.75
DXY Chart (H4)