August’s US employment report was better than expected. Payrolls rose by 1.37 million and the unemployment rate fell from 10.2% in July to 8.4% last month. The chart shows unemployment is now well below its peak of 14.7% in April and lower than its worst levels of the 2008-09 financial crisis and the deep recession of the early 1980s.
Savings & Unemployment, US
Source: Bank of Singapore, Bloomberg
Speaking after the jobs report was released on Friday, however, Federal Reserve Chairman Jay Powell stayed cautious, welcoming the recovery
but warning further progress would be harder to achieve while the pandemic continued.
"The recovery is continuing; we do think it will get harder from here. Today’s jobs report was a good one [but] to get us back to full employment, we’re going to have to get the disease under control."
Weekly Jobless Claims, US
Source: Bank of Singapore, Bloomberg
Powell’s caution is not surprising. Even after August’s payrolls gains, the US economy has still only recovered 10.6 million jobs over the summer compared to 22.2 million lost in March and April.
Moreover, the pace of labour market improvement is slowing. The US economy’s initial re-opening allowed many employees to return to their jobs quickly. But with consumers still reluctant to spend amidst the pandemic and the uncertain economic outlook, companies are more cautious about re-hiring all the workers they were forced to lay-off during the lockdown.
The chart shows that weekly falls in first time jobless benefit applications has slowed sharply. Continuing claims also show the total pool of unemployed remains very high at 13.25 million.
Thus, Powell said: "We think that the economy’s going to need low interest rates, which support economic activity, for an extended period of time. It will be measured in years." We agree and expect the Fed may keep its benchmark fed funds interest rate unchanged at 0.00-0.25% for up to the next five years.
The Fed’s dovish outlook is set to keep US Treasury yields very low, supporting risk assets while weakening the USD further. The yield curve should steepen modestly as the US economy recovers over time and inflation expectations rise. But the overall level of yields is likely to stay very low. We forecast 10Y yields at 0.90% over the next year, pushing the USD down to 1.25 against the EUR over the same period.Disclaimer applicable to recommendation
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