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  • Today’s U.S. unemployment data could be erratic
  • Unemployment claims expected to fall but remain extraordinarily high
  • U.S. trade deficit expected to widen
  • FOMC minutes downplay chances of yield curve caps


Today’s U.S. unemployment data could be erratic
 — Today’s June unemployment report is expected to show an improvement in the labor market, but could prove erratic.  The U.S. labor market data has recently been plagued by backlogs and a variety of mistakes by state and federal officials.  There is also a high degree of churning on hiring/firing as some states reopened and then partially closed back down.  Also, some companies are engaging in new layoffs as their PPP money runs out.

The consensus is for today’s June payroll report to show a +3.09 million job rise, adding to May’s +2.51 million rise. However, the range of guesstimates in Bloomberg’s survey was massive and ranged from +500,000 to +9 million. Forecasters were way off on last month’s payroll report of +2.51 million since the consensus was for a plunge of -7.5 million.

Yesterday’s June ADP report of +2.369 million wasn’t too far from the consensus of +2.9 million.  However, there was a massive upward revision for May by 5.8 million jobs, which led to a +3.1 million job rise in May rather than the original report of a -2.8 million job drop.  It was not clear how ADP got the May report so wrong.  However, yesterday’s ADP revision at least suggested that the Labor Department’s payroll report in May of +2.5 million was in the right ballpark.

There is also the problem disclosed by the U.S. Labor Department that the current U.S. unemployment rate should be about 3 points higher than it is now because the Department misclassified some workers as employed when they should have been marked as unemployed.  It isn’t clear whether the Labor Department plans to correct the error in today’s report, which could result in a big jump in today’s unemployment rate.

In any case, the consensus is for today’s June unemployment rate to fall -0.8 points to 12.5%, adding to May’s -1.4 point decline to 13.3%.  The U.S. unemployment rate in April rose to a post-war record high of 14.7%, although that was at least still well below the 24.9% record high reached during the Great Depression.

The consensus is for today’s June average hourly earnings report to show a decline of -0.8% m/m, adding to May’s -1.0% m/m decline.  On a year-on-year basis, the series is expected to ease to +5.3% y/y from May’s +6.7% y/y.  U.S. average hourly earnings are falling back towards more normal figures around +3% after spiking up to +8.0% y/y in April.  The reason for that upside spike was that more lower-paid workers lost their jobs in the early stages of the pandemic, leaving behind a pool of higher-paid workers for the average hourly earnings calculation.

Unemployment claims expected to fall but remain extraordinarily high — The consensus is for today’s weekly initial unemployment claims report to show a decline of -130,000 to 1.350 million, adding to last week’s -60,000 decline to 1.480 million.  Initial unemployment claims remain extraordinarily high because people are still being laid off from their jobs and because state unemployment offices are still catching up on the backlogs.

The consensus is for today’s continuing claims report to show a decline of -522,000 to 19.000 million, adding to last week’s -767,000 decline to 19.522 million.  The continued decline in people on the unemployment rolls is good news since it implies that people are being rehired faster than other people are being laid off.  However, the number of people on unemployment is still extraordinarily high at nearly 18 million above pre-pandemic levels.

U.S. trade deficit expected to widen — The consensus is for today’s May U.S. trade deficit to expand to -$53.1 billion from -$49.4 billion in April.  The U.S. trade deficit has soared from February’s 3-year low of -$34.7 billion mainly because exports have fallen faster than imports during the pandemic.  Exports in April were down by -27.7% y/y, while imports fell by -22.4% y/y.  World trade in general has been decimated by the pandemic.  Also, the U.S. trade balance continues to be buffeted by the raft of U.S. tariffs on imports and retaliatory tariffs on U.S. exports.

FOMC minutes downplay chances of yield curve caps — The FOMC minutes suggested that there is little chance of the Fed adopting a yield-curve target (YCT) policy even though about half of the respondents in a recent Bloomberg survey said they expect the Fed to adopt a YCT policy by September.  In a YCT policy, the Fed would set caps for Treasury yields at one or more time horizons and would commit to buying as many Treasury securities as necessary to prevent yields from going above the target.

Yesterday’s minutes from the June 9-10 FOMC meeting said, “Many participants remarked that, as long as the committee’s forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy.”  However, the minutes showed that most FOMC members do favor giving “a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding” asset purchases. 

Under the current circumstances, the Fed doesn’t need to set yield-curve targets because the market is already doing that by itself.  The 2-year T-note yield, for example, has been locked in the very narrow 9 bp range of 0.14% to 0.23% since May 1.  If the Fed were to announce a yield cap, it might be setting itself up for failure should the outlook for the economy suddenly improve and yields were to rise.  In that case, the Fed would not even want to cap yields.  The Fed would only want to cap yields if the economic outlook turned even bleaker and yields were nevertheless higher than the Fed thought justified.

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