Dollar Holds Recovery as JOLTS Confirms Rising Recession Risks

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New labour market figures from the U.S. show further cooling in conditions, raising fears that the U.S. economy is sliding into a recession.

A familiar market playbook is that the Dollar should fall and stock markets rise whenever U.S. data underwhelms against expectations because this raises the odds of Federal Reserve interest rate cuts.

However, cracks have been appearing in this trade lately: stocks are in the red, and the Dollar holds a short-term recovery after the Job Openings and Labor Turnover Survey for April undershot expectations.

The number of job openings available to those looking for work slid to 8.059M from 8.355M, whereas the market expected 8.34M. This suggests a labour market cooldown is underway, meeting a necessary condition for the Federal Reserve to cut interest rates.

"Softer labour market demand typically translates into weaker wage growth and a decline in consumer spending," says Karl Schamotta, Chief Market Strategist at Corpay.

Yet, following the numbers, the Dollar is still higher against most G10 currencies on the day, and the major markets have failed to recover. So why aren't 'bad' economic numbers proving to be 'good news' for the markets?

Some economists suggest the U.S. economy is heading for recession, i.e. the 'soft landing' markets had hoped for might not materialise. Historical data shows markets tend to underperform, and the Dollar outperform, heading into a recession.

Jeroen Blokland, founder of the Blokland Smart Multi-Asset Fund, says the equity rally has stalled because recession risks are rising, something markets were entirely unprepared for.

He cites some growing evidence for this:

1. The unemployment rate has risen recently, in line with an expected 24-month lag that typically follows the rate hiking cycle
2. Retail sales are flat; the control group actually saw a decline recently, and previous months were adjusted downward
3. The Chicago PMI is "screaming" recession
4. The ISM New Orders Index is nearing recession-like levels

The JOLTS figures provide the latest evidence of a potential 'landing' for the U.S. economy. (A hard landing refers to a marked slowdown due to the restrictive nature of the Fed's rate hikes. The 'no landing', or 'goldilocks' scenario, assumes inflation will fall back to the Fed's 2.0% target, but the economy would continue to grow.)

Recent market moves hint that a hard landing scenario could be bullish for the Dollar and bearish for markets.

That said, the Federal Reserve could choose to acknowledge these risks and next week provide fresh hints that a rate cut is nearing. If this happens, we could see a notable rally and decline in the Dollar.

All eyes now turn to Friday's all-important U.S. non-farm payroll, wage and unemployment numbers.