US Macro: A big fall in unemployment, but worrying underlying trends – The August nonfarm payrolls report confounded expectations last Friday, with a much bigger fall in the unemployment rate (from 10.2% to 8.4%) than was implied by the job gains (1.3mn). Cutting through the statistical quirks (see below), we are unlikely to see such dramatic falls in unemployment going forward, and we still expect unemployment to remain elevated over the coming months, for a number of reasons. First, as the August data confirmed, permanent layoffs have continued to increase in the background, and rose by 448k in August, having flatlined in July. Permanent job losses now total 2.2mn since March – and are rising at a rate similar in magnitude to that seen in the Great Recession. This is currently being disguised by the mass return of furloughed workers, but once this process of furloughed workers returning has completed, those permanently laid off are likely to remain unemployed for some time. Secondly, while the participation rate has been recovering in the reopening phase, it is still around 2pp below pre-pandemic levels.
We doubt that it will fully recover to prior levels given the demographic drivers weighing on labour market participation, but participation is likely to continue recovering in the near term. These two drivers are likely to keep unemployment elevated, and could even drive some temporary rises in unemployment, depending on the timing of how the various factors play out. While there remains a high degree of uncertainty, we continue to expect unemployment to end the year in the high single digits, with only a gradual fall next year.
Household vs establishment survey differences – The significant surprise in the unemployment rate reflected differences in the two surveys that are conducted for the labour market – the so-called ‘household’ and ‘establishment’ surveys (see here for details on how they differ). The household survey showed employment increasing by 3.8mn in August vs 1.4mn in the establishment survey. The large difference in the monthly change actually corrects a discrepancy that opened up with the pre-pandemic trend. The household survey always counts a higher number of employed people than the establishment survey, and the difference is usually 6-7mn. During the pandemic – when household survey employment fell more sharply than that in the establishment survey – this difference had fallen to as little as 3mn. The latest data sees a reversion to the normal 6-7mn difference. As such, this factor is unlikely to have further statistical effects from hereon. It will likely mean some modest adjustments lower to our unemployment forecasts, but it does not change our fundamental view on the labour market. (Bill Diviney)
ECB View: Central bank seen on hold his week, but tone likely dovish – The ECB’s Governing Council holds a monetary policy meeting this week. We think that the tone will be dovish, which should encourage expectations of another round of monetary easing in the coming months. A number of elements build into this view. First of all, there are early signs that the eurozone economy is significantly losing momentum. This suggests that after the initial growth spirt driven by the lifting of restrictions, the recovery going forward will be much slower. Indeed, we expect a double-dip in growth in the near term. The consequence is that spare capacity in the economy in a broad sense but also specifically in the labour market will be elevated during the ECB’s forecasting horizon. As such, disinflationary pressures will remain dominant. Second, inflation data suggest that these trends are already impacting inflation, with core inflation falling to the lowest level on record. Finally, the strength of the euro (which has been recently stemmed by ECB verbal intervention) is providing an additional disinflationary force.
Against this background, we expect the ECB to emphasise that it stands ready to ease policy further to bring inflation back to its pre-crisis path. In addition, the Governing Council should stress again that although it does not target the euro, swings in the currency do impact its macro projections and hence the appropriate stance of its monetary policy.
We think that the ECB will ease policy again by the end of this year, most likely in December. Our base case is for a EUR 500bn increase in the PEPP envelope. In addition, given sharply increasing liquidity and the fall in money market rates, we judge that the ECB will increase the tiering multiplier in the coming months. This should provide a modest boost to bank profits. Finally, we remain of the view that the deposit rate will remain unchanged. However, a significant further rise in the euro could put a rate cut back on the table. (Nick Kounis & Aline Schuiling)