Friday, January 8, 2021

Expect the US jobs market to contract, but only marginally as demand tailwinds continue to surprise

  • Dollar
  • DXY
  • US payrolls


Analysts’ Pick: Expect the US jobs market to contract, but only marginally as demand tailwinds continue to surprise

  • A drop in December’s NonFarm payrolls is expected with the impact of relatively stricter lockdown measures in more populous states compared to November already seen in jobless claims figures
  • ISM’s PMI report survey responses suggests employment will pick up as vaccines get deployed as demand continues to recover at a stronger-than-expected pace
  • Our outlook for the dollar remains little changed, but with a potential earlier-than-expected ease in the pace of decline
  • We don’t expect the uptick in yields to materially give dollar bulls a robust lift in the medium-term, at least not until stability in the economy returns

The Bureau of Labor Statistics's monthly jobs report will likely show a contraction in jobs in the US economy for December, marking the first decline since the recovery in the labour market following lockdowns being lifted in the US. This should stem from the renewed restrictions across the more populous states of New York and California which surfaced during the month. Also important is that December’s restrictions on Americans was relatively stricter across most states in the US. A multitude of alternative labour market data supports this, ranging from initial jobless claims averaging higher in December than November, an uptick in aggregated continuing claims in December and a contraction in private employment.

Jobless claims suffered an uptick in the early half of December and will likely contribute to a contraction of jobs in the labour market


ADP's private employment report for December indicated a spike in unemployment for industries more impacted by the pandemic. We expect today's official jobs report to show a similar trend as well, reinforcing the short-term headwinds that the economy is currently facing. With that said, imbalance in weakness across sectors is also anticipated, implicitly suggesting we may only see weakness in the labour market to a small extent and for a limited time. As a result, what we anticipate is a contraction in jobs in the US labour market, but only at a marginal rate of -100,000 jobs for December.

Job losses in December were concentrated in the service-providing sector for the private sector, we expect the same trend in the official report later today


The longer-term outlook for the US economy suggests more jobs to come, probably in an incremental fashion as supply chain disruptions starts to ease again, and as more vaccine doses gets deployed. ISM's PMI reports for December continues to signal this to be the most likely outcome as demand grows increasingly stronger across industries. Survey respondents for both the manufacturing and non-manufacturing sectors specifically suggested that they faced labour constraints due to the effects of the pandemic despite actually wanting to hire. Similarly, a vaccine driven recovery coupled with expectations for more fiscal stimulus with a Democrat sweep suggests more room for employment to return to pre-Covid-19 levels. We expect this to start to materialise towards the end of Q1, or early Q2 2021. This will also mean that a double dip contraction in the US economy is currently unlikely. Instead, we expect a slowdown in economic growth in the early part of 2021, before a sharp incline in the later part of 2021, in line with our full-year report for 2021.

Weak employment in both ISM’s manufacturing and services PMI report is not a signal for weak demand, but instead difficulty in retaining workers due to pandemic restrictions


Importantly, while the data is somewhat backward looking, it gives us a proxy of what to expect for the year in terms of both monetary and fiscal policy. With employment and fiscal spending likely to grow through 2021, it may mean that the Fed may see a taper back of its quantitative easing late this year or early next year. While we do expect the central bank to avoid a 2013 taper tantrum-like event again, it is also worthwhile to note of this risk moving through the rest of the year due to the velocity of impact for the current crisis.

Bond valuations are easing up and we are seeing some of that yield curve action in currency markets. But we do not expect a material uptick in the dollar to be triggered by the current jump in yields and offset the downward pressure from both the ongoing reflation trade and the impact from increased fiscal spending. Instead, we see the current jump in bond yields to be more related to risk-on positioning as well as increased debt supply instead of a robust recovery in the US economy, at least for now. Consequently, we do not expect dollar bulls to build momentum on the yield jump in the short-term until the economy gets on to a proper economic growth path.

Our expectations for the dollar remains unchanged as a result, i.e. bearish in the short-term with pace of decline looking to ease by the second half of the year, potentially even earlier than that if drug makers can produce vaccine doses at a quicker-than-expected and if deployment (and adoption) proceeds smoothly. As a result, we expect DXY to continue to fall towards and likely break the 89.19 level.

Technical Analysis:


DXY continues to trade at the bottom end of its Fibonacci retracement. Similarly, its RSI is still trading close to oversold levels after rebounding from the region late last year. Momentum suggests that downside in the index is still likely and fundamentals mostly agree. Risk aversion from short-term economic or political headwinds have seemingly been ignored by the market as well and that may not materially change in the short-term. With markets focusing on incoming fiscal spending, we expect the dollar to remain on its downward momentum and retest a support at 89.19’s level. That level will probably not hold for long as bears will likely take advantage of the downtrend to retest a low closer to 88.47

Support: 89.19 / 88.47 / 87.16

Resistance:  90.40 / 91.88 / 92.58

DXY Chart (D1)