The November nonfarm payrolls report will take centre stage on Friday (13:30 GMT) as cracks begin to appear in America’s economic recovery from the pandemic. If recent weekly jobless claims are any indication, the US labour market slowed notably during November. An expected cooling in jobs growth is likely to add pressure on the Federal Reserve to inject more monetary stimulus. But as the dollar goes into freefall in anticipation of a December move, are investors underestimating the risk of only modest action by the Fed?
Record month for stocks…and new infections
The vaccine-led rally may have given shares on Wall Street their best November since 1928, but amidst the raging pandemic, another type of record was being set. New cases of COVID-19 have been rising by more than 100,000 a day for most of the past month, even surpassing 200,000 on November 27. With the daily death toll fast approaching the peaks from the first wave in April and many hospitals reaching breaking point, fresh restrictions have been imposed across many parts of the United States.
Although analysts are not yet projecting a double-dip recession like in Europe, the growth outlook for the current and the next quarters are being sharply revised lower. Should the stalling recovery translate into job losses, the Fed is almost certain to step in with more stimulus. But for now, payrolls are growing at a healthy clip and policymakers may not feel the urgency to act this month.
Virus surge to take heat from jobs rebound
According to a Refinitiv poll, the US economy is expected to have added 481,000 jobs in November, which would represent a marked drop from the more than 600k increase of the previous two months. The unemployment rate is forecast to fall further, but at a slower rate, nudging down by just 0.1 points to 6.8%. Wage growth is also anticipated to moderate, with average hourly earnings forecast to rise by 4.3% year-on-year compared to the prior 4.5% rate.
On the face of it, the rapid decline in the jobless rate from the pandemic high of 14.7% in April to below 7% in October is very impressive. However, the fact that the labour force participation rate remains far below pre-pandemic levels suggests the official unemployment figure does not capture those that are not in a position to return to the jobs market because of the health crisis.
Fed may need more convincing than soft jobs data
But the Fed is all too aware of the long road to achieving full employment again and there’s little chance that it would take its foot off the accelerator anytime soon. Though, neither would that necessarily mean it is ready to substantially loosen monetary policy further.
The most recent remarks from Fed officials indicate most are happy with the current level of stimulus and there appears to be limited support for boosting asset purchases. Thus, there is a risk that apart from renewing some of the emergency lending facilities that are set to expire on December 31, the Fed’s only other focus in December may be to provide a stronger forward guidance, which may disappoint some traders.
Dollar downtrend in full swing
Nevertheless, worse-than-expected payroll numbers are likely to fuel speculation of significant Fed easing in December, further pressuring the US dollar against its major peers. The greenback has plumbed to more than 2½-year lows against its key rivals this week as risk appetite improves and investors bet on the Fed pumping more stimulus soon.
Looking at euro/dollar, the pair is currently testing the $1.2080 resistance and could soon clear the $1.21 hurdle from any fresh dollar selloff. Above this point, the $1.22 level may prove a more difficult obstacle to overcome before traders can turn their attention to the 161.8% Fibonacci extension of the September-November downtrend at $1.2264.
However, if the jobs report defies predictions of a sharp slowdown, the dollar could catch a bid, pushing the pair down to the 78.6% Fibonacci retracement of $1.1923. Slipping below this area would bring the 61.8% Fibonacci of $1.1855 into scope.
