Initial jobless claims / Unemployment in the U.S.

About the news

(IJC) Initial jobless claims/unemployment claims is one of the most important news in the context of global understanding of the macroeconomic situation in the USA. This indicator has a significant effect on pricing both on currency pairs, in which a certain currency is traded against the U.S. dollar, and on the stock and commodity markets.

The news itself is a DOL (Department of Labor) report on the number of initial applications for unemployment benefits last week. It allows estimating both the general macroeconomic situation and the situation in certain regions.

Initial jobless claims are calculated every week, and they are released on Thursday. With its help we can see the current dynamics of the labor market. The indicator in the moment can show a more accurate picture compared to the unemployment rate, because the unemployment rate may not be quite accurate due to changes in the structure of the labor force. For example, we may see it increasing while the IJC dynamics remain the same.

So why do we need to understand the dynamics of the labor market?

The answer to this question is simple - inflation. Yes, this indicator is very important to understand the inflation narrative and the Fed's rate decisions.

Low unemployment will always trigger inflation and vice versa. This pattern is called the Phillips curve. Let's demonstrate it on the graph and compare the dynamics of CPI and unemployment rate:

Historical data confirms this pattern. Every time unemployment rises rapidly, as a consequence, we see a decline in inflation. But it is not only inflation that we can look at through the lens of unemployment. Recession is what else we can predict from the unemployment rate/dynamics. Again, the chart shows us entering a recession every time the unemployment data rapidly picks up.

Back to the current situation: this is why it is so important for the government to see reasonably high unemployment rates and Initial jobless claims as a major factor in understanding that the economic machine will slow down and inflation dynamics will follow the right direction.

Impact on markets/economy

Thekey thing in the labor market is the demand for labor and the solvency of employers, i.e. their ability to pay employees. A strong labor market indicates that the economy does not need help and stimulus at this stage because it can provide jobs for itself.

If we dig a little deeper and ask how exactly unemployment affects inflation, we will come to the realization that everything in the economy depends on business activity within the economy.

An increase in unemployment logically means a decrease in the number of jobs, so fewer goods and services will be produced and we will see a decrease in manufacturing and non-manufacturing PMIs. Not only production falls, but also consumption. People who have lost their jobs will tighten their belts and buy much less, and demand will fall as a result.

All this happens in a chain reaction and affects both producers and consumers.

A decrease in unemployment, on the contrary, signals that people have jobs and stable wages, which they spend and create demand for products. Against this background, demand inflation can occur when the current rate of production cannot fully meet the demand for products.

Recent indicators, examples in the chart

The last data release was on July 26 and amounted to 235k, which is below expectations and indicates that the labor market is still not weak enough and reduces the probability of a rate cut at the next FOMC meeting.

A higher-than-expected reading is negative for DXY.

A below expectations reading is a positive for DXY.

At the moment of news release we observe a surge in volatility, especially on the ForEx market.

The news is quite volatile, and in most cases we cannot observe a clear price delivery in a certain direction, the probability of working out trading patterns is low. Therefore, opening or holding positions, even with a clear understanding of the dynamics of the indicator, is not recommended.