April’s employment report was far weaker than anticipated underscoring the Federal Reserve’s view that the US economy still needs to make ‘substantial further progress’ towards its goals of maximum employment and 2% inflation before the central bank will taper its quantitative easing.
Source: Bank of Singapore, Bloomberg
Last month, payrolls increased by 266,000 against hopes of a million jobs being added back to the labour market in April as the economy reopened. March’s large gains were also revised down from an initially reported 916,00 increase in payrolls to 770,000. In addition, the unemployment rate picked up from 6.0% to 6.1% as workers, returning to the labour market to look for new roles as the pandemic eases, pushed the participation rate up from 61.5% to 61.7%.
Source: Bank of Singapore, Bloomberg
Softer-than-expected jobs growth, still high unemployment and rising participation show the labour market remains far from meeting the Fed’s goal of maximum employment. The charts show 8.2 million lost jobs have still to be recovered from the pandemic. Unemployment at 6.1% is well above its 3.5% rate prevailing at the start of 2020. Labour force participation at 61.7% is markedly below its 63.4% pre-pandemic level and employment-to-population - a ratio cited recently by New York and Richmond Fed Presidents Williams and Barkin - at 57.9% is again far below its 61.1% rate from early last year.
We expect the Fed will look through increases in inflation above its 2% target this year as the economy re-opens and instead will keep its quantitative easing unchanged during 2021 until the labour market fully recovers. Thus, we only see the Fed reducing its USD120 billion a month of bond buying in early 2022 after announcing its shift in December. We also do not expect the Fed to raise fed funds from 0.00-0.25% until 2024.
The Fed’s dovish stance will keep risk assets buoyant throughout 2021 to the detriment of the ‘safe-haven’ USD. After the jobs data came out on Friday, the S&P 500 closed at a new record high of 4,232, gold hit USD1,830 and the EUR and offshore CNH rose to 1.2165 and 6.41. We remain USD bears, forecasting the EUR and CNY to reach 1.25 and 6.15 over the next 12 months. We also see 10Y Treasury yields only rising to 1.90%, still very low historical levels, as the Fed stays dovish.
