Dollar Serenades U.S. Jobs Surge after Labour Market Reopening Drives Surprise Slump in Jobless Rate

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The Dollar jumped alongside U.S. equity futures Friday after official data showed a surprise surge in employment driving a steep fall in the jobless rate during May, suggesting the American labour market began to recover promptly from the moment the economy began to reopen. 

U.S. employment figures blindsided analysts, economists and investors alike on Friday when they showed the economy creating 2.5 million new jobs last month, which couldn't have been in starker contrast to the -7.7 million fall that consensus was looking for. This drove a partial unwinding of the unemployment rate from 14.7% to 13.3%, although the real decline could've been even larger given that statistical flaws were seen suppressing the rate of increase in April. 

The Bureau of Labor Statistics said "employment rose sharply" in leisure and hospitality, construction, education and health services as well as retail trade while a preexisting decline in employment by the government endured through last month, which saw more states reopen local economies according federal guidelines handed down by the White House. Some began reopening in late April although most only did so last month.

"The US labour market started the healing process a month earlier than anticipated," say Andrew Grantham and Katherine Judge at CIBC Capital Markets. "The unemployment rate fell during the month despite a partial rebound in the participation rate. The decline in the unemployment rate masked some further classification issues that would have otherwise worked to leave the unemployment rate 3%-points higher than the reported figure in May."

Above: Pound-to-Dollar rate slips as S&P 500 futures (black line) and Dollar Index (orange line) rise at 15-minute intervals. 

Markets care about the labour market data because it has a direct bearing on the level of consumption, inflation and as a result, bond yields and benchmark interest rates of an economy. The pace at which those labour markets return to pre-virus levels of employment, if they do, will be key to determining how quickly central banks can take their foot of a metaphorical monetary policy pedal that's been pushed to new extremes by the pneumonia inducing disease.

That in turn, could be an important influence on the pecking order of performance in the currency market during the weeks and months ahead, more so now that at least some post-lockdown figures are becoming available. In just the same way as relative economic growth rates were the dominant driver of currencies before the virus, relative recovery rates could be an important influence on exchange rates up ahead. 

However, there are still many unknowns, the analyst community remains divided over the outlook for major exchange rates and most currencies have until now been following the stock markets, with the exception of the U.S. Dollar which has mostly moved in the opposite direction.

"The biggest payroll surprise in history, by a gigantic margin, likely is due to a wave of hidden rehiring. Businesses which let people go in large numbers in March didn’t need to post their intention to bring people back on Indeed; they just needed to call," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "Still, it's a mystery why ADP didn’t pick this up, and it contradicts the continuing claims numbers."

Above: Pound-to-Dollar rate at daily intervals with S&P 500 futures (black line) and Dollar Index (orange line). 

The Dollar Index extended an earlier modest gain to hit 97.0 while S&P 500 futures spiked above 3,150 in response to the announcement, which prompted a brief turn lower in the Pound-to-Dollar rate from 1.2680 down to 1.2650. The Euro-to-Dollar rate dipped below the 1.13 handle while the USD/JPY and USD/CHF exchange rates furthered already noteworthy intraday gains. 

Friday's payrolls figures came as the Dollar Index scored its first intraday gain for almost a fortnight after suffering eight back-to-back declines, a symptom of how the greenback has increasingly come off the boil in recent weeks, which many attribute to reduced safe-haven demand.

Investors have looked past the coronavirus over recent weeks even as the related collapse is set to be borne out in economic data during the months ahead, instead positioning for the beginning of a new business cycle.

"Global equities (MSCI world index) are up by an impressive 39% since the bottom of March 23. They are up by 7.3% just the last two weeks. They are still down by 5.8% for the year, but this seems very little to us given the severe recession," says Athanasios Vamvakidis, head of FX strategy at BofA Global Research. "The evidence suggests to us that FX and equities are effectively the same trade. If equities keep going up, the USD will keep going down."