Market dissects confounding jobs report
Summary
The highly anticipated June jobs report delivered conflicting results with a strong beat in payroll expectations diverging from the slight increase in the unemployment rate. The dollar had another week of appreciation before cooling on Friday as interest rates dipped slightly. Oil prices neared six-year highs as OPEC+ failed to agree on increasing supply.
Economic outlook
The Federal Reserve continued with hawkish rhetoric throughout the week. Dallas Fed President Kaplan said he hopes tapering will begin soon and expects a smoother process than the post-Great Recession unwinding of the balance sheet, which included the “taper tantrum” of 2013.
On Friday, the Bureau of Labor Statistics unveiled the June employment numbers. Payrolls increased 850,000 in June, compared to the consensus estimate of 706,000. The hospitality industry achieved the largest job gains, notching a gain of 340,000 as restrictions loosened across the country. The beleaguered industry is still 2.2 million jobs short of pre-pandemic levels and the unemployment rate of the sector stubbornly remains above 10%. Retail and business services also showed strong results compared to their May numbers, adding 67,100 and 72,000 jobs, respectively. As economic recovery continues to impact different industry sectors in different ways, many of our clients’ hedging programs and objectives are being tailored to their current and forecasted risk profiles.
The unemployment rate moved against projections as it ticked higher to 5.9%, contradicting the strong non-farm payroll numbers. Household and payroll data come from two different surveys and the divergence results from different criteria and metrics applied. A decrease in the self-employed and seasonality adjustments of unpaid leave likely boosted the payroll number compared to the household survey, which also includes farm employment. When the household survey numbers are adjusted to reflect the employer survey concepts, as seen in the chart below, the difference is far less striking with employment increasing 604,000 in June. The labor force participation rate remained stagnated at 61.6%, while wages posted a strong 3.6% year-over-year rate but decreased marginally on a month-over-month basis. Rates moved slightly lower as the market put more weight into the household survey results.
(Related insight: Register for the “Semiannual Market Update for Corporations” webinar with Amol Dhargalkar and Kevin Jones)
Dollar caps off strong month
The dollar had its best month since March 2020 as the more hawkish stance from the Federal Reserve drove more international investors towards the dollar. Following the release of the jobs reports, the dollar gave up some gains as interest rate expectations decreased.
(Related insight: Read the article, "Strategies for managing FX volatility.")
Oil continues to rise as OPEC+ remains deadlocked
The price of oil continued to climb last week as the market mulled the possibility of limited supply lasting throughout the second half of the year. The Organization of the Petroleum Exporting Countries and allies (OPEC+) were deadlocked on any production increases after meeting last week in Vienna. Saudi Arabia was lobbying for an increase in supply to rein in prices, but stiff opposition from the United Arab Emirates (UAE) held back a deal. The heart of the disagreement is about the market share within OPEC rather than opposition to production increases. The UAE believes the baseline numbers, set nearly four years ago, should be revisited before any changes to supply. Americans faced the highest gasoline prices in nearly seven years over the holiday weekend, prompting the White House to lobby OPEC members to reach a compromise. West Texas Intermediate closed at $76.95 per barrel on Friday, while Brent ended at $76.06 per barrel.
Looking ahead
On Wednesday the Federal Reserve will release FOMC minutes. The market will watch closely for more details on how the Fed may begin to taper their balance sheet, which recently swelled to over $8 trillion. The Department of Labor will release initial jobless claims on Thursday and wholesale inventories data will wrap up the week on Friday.
About the author
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James Mallon
Analyst
Corporates | Kennett Square, PA
James is an analyst on Chatham’s Corporates Sector, specializing in foreign currency, interest rate, and commodity hedging analytics and strategy.
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