[US] Initial Jobless Claims: The Surge Is Related to Seasonal Factors

Data Interpretation

Summary:

US initial jobless claims jumped to the highest level since last August, in line with signals of the softening labor market. Several economists said that the latest rise in initial jobless claims may be related to seasonal factors.

The US Department of Labor announced the latest initial jobless claims at 8:30 a.m. ET on May 9:

The number of US initial jobless claims for the week of May 4 was 231,000, compared with the expected 215,000 and the previous value of 209,000.

The four-week average of initial jobless claims for the week of May 4 was 215,000, compared with 210,250 in the previous month.

US jobless claims jumped to the highest level since last August, which is also the largest increase since the start of the year, in line with recent signals of the softening labor market. Until last week, initial jobless claims for the past three months had remained between 200,000 and 222,000.

While resilient demand has made businesses reluctant to lay off workers, the latest monthly jobs report shows hiring activity has slowed.

The latest rise in initial jobless claims may be related to seasonal factors. New York City public school staff, such as bus drivers, can claim relief during winter and spring break, which tends to drive up weekly claims. New York City public schools have started the spring break from April 22 to 30.

This abnormal growth momentum may not continue, and it may decline significantly in the future.

Initial Jobless Claims Report

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Samantha Luan

Economic

Energy

Lured by official promises of cheap hydropower, China Hongqiao Group and a handful of other coal-reliant smelters several years ago began moving 6.56 million metric tons of capacity - about 15% of China's total - from the northern rust belt to the mountainous and ethnically diverse Yunnan province, known for tea, coffee and wild mushrooms.

The opportunity to cut electricity bills and help the world's top polluter tackle global warming seemed like a safe bet. But as Yunnan's rivers and reservoirs dwindled amid poor rainfall, which some experts attribute to climate change, so did the reliability of electricity.

Reuters interviews with almost two dozen industry figures and analysts, as well as company filings and official documents, found insufficient hydropower has meant that only a little over half of the planned aluminium capacity shift has materialised. Some smelters are slowing or scaling back their already-delayed plans and others are seeking alternative locations.

"The power cuts in the past two years have made it clear that Yunnan can't be sustained as a major producing region," said one Yunnan industry figure who, as with others, spoke on the condition of anonymity due to the issue's sensitivity.

Despite growing demand for low-carbon products and strong industry profits in recent years, eight employees at four Yunnan smelters said they have had to cut production by 10% to 40%.

Muyi Yang, an adjunct fellow at the University of Technology Sydney who researches energy policy, said any supply disruptions would delay China's broader energy transition because aluminium is used in many clean technologies.

In addition to hindering China's climate goals, the hydro crunch has caused volatility in global aluminium prices and imperilled the potential for producers to cash in on demand for "green" metal, according to the analysts and industry sources.

Hongqiao's plan to move almost 4 million tons of production from Shandong province to Yunnan involved building two plants near the Vietnam border, in Wenshan and Honghe prefectures, each with capacity of roughly 2 million tons.

The 17 billion yuan ($2.35 billion) Wenshan factory opened in 2020 and was intended to reach full capacity in August 2022, the director of the industrial park where it is located told state media in 2021. But unstable hydropower has prevented that, two industry figures said.

At Honghe, production was due to begin in March 2023, according to a December 2021 overview of projects published by the Yunnan Department of Industry and Information Technology. Yet, initial production capacity of just 500,000 tons will be ready in the middle of this year, according to a person familiar with the matter.

Chen Xinlin, a senior metals and mining consultant at Wood Mackenzie, said Honghe's capacity may not be commissioned this year due to the "hydropower bottleneck".

Hongqiao and its parent, Shandong Weiqiao Pioneering Group, did not respond to Reuters questions about the matter, and the Yunnan government declined to comment.

China's environment and industry ministries, and the top planning agency, the National Development and Reform Commission (NDRC), did not respond to requests for comment.

GREEN DREAMS

Aluminium accounts for about 3% of the world's direct industrial carbon dioxide, according to the International Energy Agency.

For China, that meant cleaning up the sector would be crucial to its goals, formalised in 2020, of ensuring the country's carbon emissions peak by the end of this decade and reach net zero by 2060.

Part of the allure of aluminium made from hydropower or other clean energy is that producers may be able to charge premiums as global manufacturers raise their carbon standards for materials, though only a tiny proportion of green aluminium currently attracts such a premium.

Besides Hongqiao, producers including industry leader Aluminium Corporation of China, known as Chinalco, were drawn to Yunnan by provincial authorities' offer of discounted greener power at 0.25 yuan per kilowatt hour (kWh), less than half of what they were paying in northern China.

Chinalco announced in 2018 that it would move 1.2 million tons to Yunnan, and suppliers including anode producer Sunstone Development followed. Neither responded to requests for comment.

The new smelters brought in staff from China's north, with factory canteens serving braised noodles and shaobing, a flatbread stuffed with meat, to give workers a taste of home.

The plants produce silver-coloured ingots cast from molten aluminium into square-shaped bundles. These are collected by trucks and delivered to factories for processing into goods such as car parts, window frames and beer cans.

A 2022 World Economic Forum report anticipated that 2 to 3 million tons of primary aluminium production would move annually to China's southwest, mostly Yunnan, from 2020 to 2025, tapering to 90,000 to 100,000 tons per year by 2060.

The pace has been much slower.

Officials had been aware that power was a potential constraint.

"Solving power supply issues is the first thing Wenshan needs to work on to develop a green aluminium industry," He Chun, deputy bureau chief of the Wenshan Energy Bureau, told state media in 2021.

But rains proved uncooperative. Yunnan's Water Resources Department said in January that severe drought had persisted for a fifth year, leading to reduced hydropower generation.

On April 16, Wenshan officials warned of extreme drought conditions in Yanshan county, where several aluminium plants are located, including a Hongqiao smelter. Average rainfall so far this year is down 37%, according to the Wenshan government.

Adding to the smelters' dilemma, the NDRC in 2021 banned discounted power rates for aluminium producers.

'MAY THERE BE MORE RAIN'

In interviews with Reuters, 10 of the industry figures at smelters that moved to Yunnan described higher-than-expected electricity rates and periodic orders from the energy provider, China Southern Power Grid, to shut down on short notice.

Electricity rates had risen to 0.47 to 0.50 yuan per kWh, seven of these people said, still below what smelters paid in the north.

China Southern did not respond to a faxed request for comment.

Producers including Chinalco-owned Yunnan Aluminium and Henan Shenhuo Coal & Power, neither of which responded to requests for comment, have cited Yunnan's power-supply problems in financial filings.

In its 2023 annual report, Shenhuo warned that further increases in electricity rates or supply disruptions would create uncertainty for its operations.

Yunnan has sought to free up electricity by curbing transfers to other provinces. The provincial government has also said it will accelerate construction of wind and solar power, as well as more hydropower stations, and bolster its capacity for thermal power, which mainly comes from coal.

But frustrated smelting-industry figures talk of looking elsewhere.

"No one dares to stick with their relocation plan" because of Yunnan's power issues, said a manager at a Yunnan smelter.

Analysts expect more capacity to shift to northwestern China, where there is more access to power, including from coal that can assure stable supply for smelters.

In May 2023, Weiqiao's chairman Zhang Bo announced plans with Shandong Chuangxin Group to build a green aluminium base in Inner Mongolia, powered by wind and solar, according to a statement on the regional government's website.

For now, Yunnan smelter operators are looking to the skies.

"May there be more rain, that's the best thing we can wish for," said one smelter employee.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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FastBull Featured

Remarks of Officials

On May 9, local time, the Bank of England (BOE) announced its latest monetary policy, leaving interest rates unchanged at 5.25% by a 7-2 vote. Two of the members preferred to cut the Bank Rate by 25 basis points to 5%, indicating one more in favor of a cut than at the last meeting. More details of the monetary policy are shown as follows.

In the latest forecast, the rate is expected to fall from the current 5.25% to 3.75% at the end of the forecast period, compared to 3.25% in its February forecast, a difference of 50 basis points.

The economy is expected to grow 0.4% in the first quarter and 0.2% in the second quarter this year. Although demand growth has picked up, it will remain below potential supply growth. Given the ongoing restrictive stance of monetary policy, some degree of economic weakness is expected this year, next year, and beyond the forecast period.

The inflation in the services sector has declined but remains high. CPI inflation is expected to fall to the 2% target in the near term, but will rise modestly to around 2.5% in the second half of this year as the base effect of energy prices recedes. It is projected to be 1.9% in 2026 Q2 and 1.6% in 2027 Q2. At the same time, the Middle East conflict poses upside risks to the short-term inflation outlook, despite its modest impact on crude oil prices.

The labor market continues to ease, but remains relatively tight by historical standards. Some data suggest a slowdown in wage growth.

Headline CPI inflation continues to recede, in part due to lower commodity prices. Tight monetary policy is continuing to depress the real economy, easing labor markets and restricting inflation. Persistent indicators of inflation have eased, but remain high.

Monetary policy needs to remain restrictive for a sufficiently long period to ensure a sustained decline in inflation to the 2% target. The Committee will continue to monitor inflationary pressures and the resilience of the overall economy, including labor market tightness, wage growth, and services inflation, in order to assess whether inflation risks have receded and how long to maintain the current level of interest rates.

Monetary Policy Report

Risk Warnings and Disclaimers

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FastBull Featured

Daily News

[Quick Facts]

1. Initial jobless claims hit a record high since August last year.

2. Israel strikes eastern Rafah as cease-fire talks end with no deal.

3. Fed's Daly says more time needed for restrictive rates to bring inflation down.

4. The BOE says rate cuts may exceed expectations, without a pre-set path.

5. The Bank of Japan says early rate hikes are possible.

[News Details]

Initial jobless claims hit a record high since August last year

U.S. initial jobless claims increased by 22,000 to 231,000, higher than the expected 212,000, rising to the highest level since last August. Prior to this data, initial jobless claims had remained between 200,000 and 222,000 for the past three months. The data is in line with the recent gradual cooling labor market.

While resilient demand has discouraged companies from laying off workers, the latest monthly jobs report showed a slowdown in hiring activity. Nonetheless, the labor market has largely exceeded expectations over the past year and has provided a boost to the economy.

For now, Fed officials still continue to closely monitor labor demand and wage growth and discuss when to start cutting interest rates. This data may not satisfy the Fed.

Initial jobless claims hit a record high since August last year

Non-direct talks between Israel and Hamas in Cairo have been suspended due to continued Israeli ground attacks on Rafah, a senior Israeli official said late Thursday. Israel has submitted to the mediators its reservations to the hostage release deal proposed by Hamas and will continue its military operations in Rafah "as planned."

Negotiators from Hamas, Israel, Qatar, and the United States left Egypt on the same day after the Gaza ceasefire talks stalled.

It is reported that Israel's war cabinet will convene a meeting on the evening of May 9 local time to discuss the launch of military operations against Rafah. A large number of Israeli tanks and armored vehicles were deployed in the Israeli border area near Rafah.

Fed's Daly says more time needed for restrictive rates to bring inflation down

San Francisco Fed President Mary Daly said on Thursday that interest rates are currently dampening the economy, but it may take more time to bring inflation back to target. Recent data has explained why officials can't declare victory until they are convinced that inflation is under control. There is still considerable uncertainty about what will happen to inflation in the coming months and what we should do about it.

There is no need for the Fed to depress the economy in order to further ease inflation. If the labor market begins to deteriorate, interest rate cuts could be considered, but it is still too early to declare the labor market fragile or shaky.

The BOE says rate cuts may exceed expectations, without a pre-set path

The Bank of England (BOE) announced its latest interest rate decision on Thursday, local time, with a vote of 7-2 to leave interest rates unchanged at 5.25%. Deputy Governor Ramsden and Monetary Policy Committee member Dhingra supported a rate cut, indicating one more member in favor of a rate cut compared to the last decision.

The market had expected an 8-1 vote, so the GBPUSD briefly dropped by over 35 points after the decision was announced.

The policy statement indicated that it will pay close attention to upcoming data releases and use them to assess whether inflation is continuing to decline. On this basis, the Committee will continue to assess how long the benchmark interest rate should remain at current levels.

The inflation target is expected to be 2% in the second quarter of 2024, rising to 2.6% (previously 2.8%) in 2025 and falling to 1.9% (previously 2.3%) in 2026 and 1.6% (previously 1.9%) in 2027.

GDP is projected to grow by 0.4% in Q1 2024 from last quarter and by 0.2% in Q2. GDP is projected to increase by 0.5% in 2024 (up from 0.25% previously), by 1% in 2025 (up from 0.75% previously) and by 1.25% in 2026 (up from 1% previously).

We may need to cut interest rates to make policy less restrictive, BOE Governor Andrew Bailey said at the press conference. Interest rates could fall more than the market expects, but there is no pre-set path for the pace or magnitude of the cuts, which will depend on the evolution of the data.

Before we cut rates, we need to see more evidence that inflation will stay low, said Bailey, I am optimistic that things are moving in the right direction. A rate cut in June can neither be ruled out nor considered a fait accompli.

After this rate decision, traders increased their bets on a rate cut by the Bank of England, favoring a first cut in June.

The Bank of Japan says early rate hikes are possible

A summary of the Bank of Japan's (BOJ) April policy meeting showed that members are closely watching the impact of a weaker yen on inflation and believe that interest rates may be raised sooner.

According to the summary of comments, some members believe that the pace of rate hikes is likely to be faster than expected amid growing prospects for inflation to remain at or even exceed the BOJ's 2% target level. This underscores BOJ Governor Kazuo Ueda's recent remarks hinting at the possibility of multiple rate hikes in the future and increases the likelihood that short-term borrowing costs will rise in the coming months.

[Focus of the Day]

UTC+8 14:00 U.K. 3-Month GDP Estimate MoM (Mar)

UTC+8 22:00 U.S. UMich Consumer Confidence Index Prelim (May)

UTC+8 15:30 ECB Executive Board Member Cipollone Speaks

UTC+8 19:15 Bank of England Chief Economist Pill Speaks

UTC+8 19:30 ECB's Minutes of Its April Monetary Policy Meeting

UTC+8 19:45 BOE Monetary Policy Committee Member Dhingra Speaks

UTC+8 21:00 Fed Governor Bowman Speaks on Financial Stability Risks

UTC+8 22:00 Dallas Fed President Logan Answers Questions

Risk Warnings and Disclaimers

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Thomas

Economic

Canadians are “proactively” adjusting to higher interest rates, and the financial system “remains resilient,” the central bank said in its annual review of the system published Thursday. And while payments have risen for about half of the country's mortgages, households have higher wages and savings, officials said, and they're adjusting their spending patterns.

“Overall, the evidence suggest that households have the flexibility to continue servicing their debt at higher rates,” Senior Deputy Governor Carolyn Rogers said at a news conference.

Many households and businesses built up liquid assets during the pandemic, the bank said, and a “growing number” of mortgage borrowers with fixed-payment flexible rate mortgages are making lump sum payments ahead of renewal.

The lack of widespread financial stress gives policymakers room to focus their attention on inflation as they weigh when to start lowering borrowing costs. There's less urgency for immediate or deep interest rate cuts if Canadian households can handle a higher-for-longer interest rate environment, especially amid reduced recession risks.

Still, non-mortgage borrowers with credit card and auto loan debt are struggling, the central bank said, and the proportion behind on payments has returned to or surpassed pre-pandemic levels. Just over one in 10 Canadians without a mortgage has a credit card balance of 80% or more of their limit, the bank said, from a low of just under 8% in 2021.

Policymakers also flagged “stretched” financial asset valuations in US and Canadian equities and corporate bonds, saying they “may not properly reflect risks to the economic outlook and therefore increase the likelihood of a disorderly price correction.”

The bank said business insolvencies, which have grown sharply in recent months as generous pandemic-era loans expire, are “mainly the result of a catch-up effect,” though higher rates and slower demand are contributors to the increase.

Officials said small and medium-sized banks are most exposed to risks around commercial real estate at around 20% of loans, but noted those risks aren't concentrated in a single area of the financial system.

In the news conference, Governor Tiff Macklem expressed concern about hedge funds doing cash-futures basis trades in the government bond market. It's a popular trade in the US that has grown in Canada, where traders capitalize on price differences between bonds and bond futures.

“In order to make this worthwhile, you need to do a lot of it, and to do a lot of it, you need to borrow,” Macklem said. If bonds suddenly repriced, margin calls or the need to unwind those trades could “really amplify the market swing,” he warned.

Hedge funds and pension funds have “significantly” raised their leverage in repo markets, up 75% and 14% respectively in the last year, the bank said in its report. The risk is amplified by higher government debt issuances, which could cause bond yields to rise.

Canadians are among the most indebted people in advanced countries, and elevated home prices and high borrowing costs have pushed housing affordability to the worst levels in decades. At the end of 2023, over a third of new mortgages had debt-service ratios greater than 25%, the bank said, up from less than one-fifth before the pandemic.

Macklem and his officials will next set rates on June 5, and the majority of economists in a Bloomberg survey see policymakers cutting the benchmark overnight rate to 4.75% at that meeting. Markets put the odds of a cut at about two-thirds.

Underlying price pressures eased in the first three months of the year, but the central bank has said it wants to see further progress on disinflation before cutting rates. April's CPI data, scheduled for release on May 21, will be an important determining factor for the governing council's decision.

Source: Bloomberg

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Kevin Du

Economic

Central Bank

Forex

Household Spending and the Bank of Japan Rate Path

On Friday (May 10), household spending numbers for March put the Bank of Japan and the USD/JPY under the spotlight.

Average household spending increased by 1.2% in March after advancing by 1.4% in February. Economists forecast household spending to fall by 0.3%.

Furthermore, household spending was down 1.2% in March year-on-year after falling 0.5% in February. Economists expected household spending to decline by 2.4% year-on-year.

The better-than-expected household spending figures could fuel investor expectations of a BoJ rate hike. Wage hikes in March may have contributed to the unexpected jump in household spending. Household spending could fuel demand-driven inflation and allow the BoJ to discuss interest rate hikes.

After the household spending figures, investors should monitor Bank of Japan commentary. Reaction to the numbers and views on inflation and the timing of a BoJ rate hike could influence buyer demand for the Yen.

US Economic Calendar: Michigan Consumer Sentiment and FOMC Member Speeches

Later in the Friday session, Michigan Consumer Sentiment numbers will warrant investor attention.

Economists expect the Michigan Consumer Sentiment Index to decline from 77.2 to 76.0 in May. Weaker-than-expected numbers could raise investor bets on a September Fed rate cut.

Falling consumer confidence could affect consumer spending. Downward trends in consumer spending may dampen demand-driven inflation and allow the Fed to cut interest rates.

Beyond the headline figure, investors should also consider the sub-components. Economists forecast the Michigan Inflation Expectations Index to fall from 3.2% to 3.1%. Additionally, economists expect the Michigan Consumer Expectations Index to increase from 76.0 to 77.3.

Following the recent US jobless claims figures, investors should monitor FOMC member chatter. FOMC members Michelle Bowman, Austan Goolsbee, and Michael Barr are on the calendar to speak. Views on the US economy, inflation, and the Fed rate path could move the dial.

Short-term Forecast

Near-term trends for the USD/JPY depend on Bank of Japan chatter, US consumer sentiment trends, and FMOC member chatter. The better-than-expected household spending numbers and waning US consumer confidence could tilt monetary policy divergence toward the Yen.

USD/JPY Price Action

Daily Chart

The USD/JPY remained comfortably above the 50-day and 200-day EMAs, affirming the bullish price signals.

A USD/JPY return to the 156 handle could give the bulls a run at the 158 level. A breakout from 158 could support a move toward the April 29 high of 160.209.

Bank of Japan chatter, US consumer sentiment, and FOMC member speeches need consideration.

Alternatively, a USD/JPY fall through 155 could signal a drop to the 50-day EMA. A fall below the 50-day EMA could give the bears a run at the 151.685 support level.

The 14-day RSI at 55.93 suggests a USD/JPY return to the 160 handle before entering overbought territory.

Source: FX Empire

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FOREX.com

Economic

Commodity

Forex

Commodities love USD weakness right now

You can't help but notice just how sensitive commodities are to US dollar movements right now. Take the price action on Thursday as a prime example with an unusually large increase in US jobless claims sparking big gains across the complex, seeing names like gold, silver and copper push back towards their YTD highs.

The asymmetric reaction provides a sense of how the stronger dollar has acted as a handbrake on commodity prices this year, limiting what may have been otherwise a spectacular rebound. It also makes you wonder what may happen when the strong dollar story breaks apart? If not accompanied by amplified global recession fears, you get the sense commodity prices may fly.

USD heavily influenced by Fed rate expectations

When assessing that prospect, there are worse market indicators to monitor than the front-end of the US bond curve. As this chart shows, the daily correlation between the US dollar index and US two-year bond yields over the past quarter stands at 0.89, implying the dollar usually follows movements at the front-end of the US curve.

When yields drop, so too does the dollar typically, and vice versus.

Gold, Silver and Copper Eyeing Upside, US Inflation Report Key to US Dollar Impact_1

US 2-year bond futures at key juncture ahead of US CPI

Given the strong positive relationship between the two, I'm paying close attention to moves in US two-year Treasury note futures. I described this instrument as a noise eliminator in a post earlier this week, using it as a filter to gauge trade setups in markets directly involving the US dollar or where the dollar can be highly influential.

As you're tracking a highly liquid market that measures price rather than yields, I find note futures can combine fundamentals and technicals to get a clean read on directional risks for US rates and FX.

Right now, the jury is out when it comes to whether we're witnessing a turning point for the big dollar with futures remaining close to key horizontal resistance with the 50 and 200-day moving averages sitting just above. This zone looms as important when it comes to directional risks for the dollar and short-end rates, managing to repel an attempted break higher last Friday following the release of softer-than-expected payrolls and ISM services PMI data.

Gold, Silver and Copper Eyeing Upside, US Inflation Report Key to US Dollar Impact_2

I don't know what direction futures will break from here. Honestly, I don't care. But I will be acting upon the signal it eventually delivers.

Should futures break higher, it points to a softer US dollar and firmer risk appetite, as long as not accompanied by recession fears. But should futures reverse course and push back towards the YTD lows, that would be problematic for risk appetite and cyclical assets given it would imply a growing risk of no rate cuts from the Fed this year.

When you look at the macro event calendar next week, you get the sense the US consumer price inflation report may be the catalyst to generate the signal from this indicator. But that's just a hunch – the signal could arrive from no obvious catalyst at all.

As I wait for the signal on rates and dollar, my bias for commodities such as gold, silver and copper is higher.

Gold looks great

Gold looks great on he charts, continuing to consolidate above former record highs within a broader uptrend. With RSI breaking its downtrend and MACD looking like it may soon crossover from below, momentum looks to be shifting higher once again. Having tried and failed on multiple occasions to break below $2285 in May, that would provide a decent entry level for longs, should the price return there. A stop could be placed below the level for protection.

Alternatively, should the price get a foothold above $2355.10, that too would be a decent entry level, allowing for a stop to be placed below targeting a retest of the 2024 high above $2430.

Gold, Silver and Copper Eyeing Upside, US Inflation Report Key to US Dollar Impact_3

Silver arguably even better

Silver looks arguably the most bullish market of the base and precious metals covered, breaking out of the falling wedge earlier this month before doing away with minor resistance levels at $27 and $27.75. With MACD crossing over from below and RSI breaking its downtrend, momentum is building to the upside.

Those considering establishing longs would buy now or wait for a possible pullback towards $27.75, allowing for a stop-loss to be placed below for protection. The initial trade target would be the YTD high around $27.75 with the 2021 high of $30.08 located not far above.

Gold, Silver and Copper Eyeing Upside, US Inflation Report Key to US Dollar Impact_4

Copper coiling and consolidating

Copper sits in a pennant formation within a broader uptrend dating back to February. With RSI breaking its downtrend, momentum may be about to turn higher, pointing to the potential for a bullish breakout of the pennant, opening the door to a possible move beyond the YTD high around $4.70 to a resistance zone starting from $4.82. The 2022 high of $5.04 sits just above.

Should these bullish trade setups play out, I will be using the signal from short-end US rates to determine whether to cut, hold or add whenever it is delivered.