Flip Side of Strong July Payrolls

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The US economy created more than expected jobs in July, a report showed on Friday. Despite small positive deviation with consensus estimate it was a big surprise since several alternative data sources (Homebase data, ADP report) indicated the risk of downside surprise. The solid report had material impact on USD position, highlighting case for broad DXY consolidation, but it wasn’t a game-changer since the Fed made it clear major changes in policy should be expected in September. It is unlikely that positive July reading can prompt serious revisions in the track of recovery.

USD attempts to develop last week’s momentum on Monday, targeting the upper bound of the current range (92.50-94.00) buoyed by optimism related to positive expectations on retail sales report which is due on August 14.

Jobs count increased by 1.763M compared with consensus estimate of 1.48M while official unemployment rate declined to 10.2%. Wages grew by 4.8% YoY, but growth estimates are naturally skewed to the upside as proportion of high-skilled workers relative to low-skilled workers increased because of higher rate of layoffs among unqualified labor in this recession. Service sector posted predictably faster pace of recovery, adding 592 thousand jobs.

Despite declining official unemployment rate, the government continues to support an army of unemployed which is somewhat higher than official estimates. This can be seen from “alternative” unemployment benefits data. Although official estimate of unemployed is approximately 16M, about 13M people receive payments under PUA (Pandemic Unemployment Assistance), i.e. the number of people receiving unemployment benefits is more than 31M:

Excerpt from the latest report on unemployment benefits. Release date: August 6

In light of these figures, we can conjecture the negative side of strong July payrolls: Republicans and Democrats can now extend tug-of-war process in the negotiation of terms of the next fiscal deal thanks to easing pressure from improving incoming data. This extends duration of the dip in incomes since extended unemployment benefits program expired a week ago.

Having found support in the 92.50-92.60 zone, the dollar index entered a period of consolidation, which is likely to remain until the Republicans and Democrats agree on the terms of a new package of fiscal support for the economy.

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