Both the dollar and US stocks dropped yesterday, an untypical development in the markets. Usually the currency and the stock market go in opposite directions. When both the currency and the stock market slide, it’s a sign the market is worried about an underlying issue in the economy.
The initial and continuing jobless claims released last week was a catalyst backed up by lackluster earnings being reported this season so far. Although companies managed to report higher sales than expected, their profit margins have been hammered. The combination of high inflation makes doing business more expensive, and slowing consumer sentiment makes passing those costs onto consumers more difficult.
The wrong kind of upside
When companies are facing margin compression, they slow down hiring, or start firing. The number of people currently on unemployment benefits (continuing jobless claims) hit the highest level since November of 2021, after months of steady increases since last September.
The largest increase in new unemployed (initial jobless claims) came from California, the hub of the tech sector which has turned to job cuts to get costs under control. The tech and financial sector in California have been particularly hard-hit with the collapse of three regional banks associated with tech firms. SVB was a key financier for tech companies, and Signature Bank was concentrating on advancing crypto.
The shifting focus of the Fed
Employment figures are seen as a lagging indicator, because businesses will try to find other ways to maintain profitability before cutting staff. Once unemployment is getting out of hand, the economic problem is already in full swing.
Until now, the Fed has been largely focused on fighting inflation. Before the SVB collapse, there were a couple members who commented on the labor sector, but that wasn’t the Fed focus. The labor market would be indirectly related to the Fed’s interest in inflation, because a tight labor market can push labor costs higher, and influence inflation. The Fed is in the process of trying to slow the economy, and slowing the labor market is part of that equation.
Why did the dollar go down?
The dollar tracked lower because US treasury yields fell, based on an increasing expectation that the Fed will be forced to cut interest rates by the end of the year. That’s because the Fed doesn’t just deal with inflation; it also must maintain full employment.
If the unemployment rate starts to tick up substantially in the coming months, the Fed will start to get into trouble with the second part of its dual mandate. Even if inflation is high, which would put pressure on the Fed to keep rates up; rising unemployment could cause the Fed to “pivot”. As the number of people on unemployment keeps rising, the market could become more and more focused on jobs data. Which means NFP could come back to being one of the big market movers.