The U.S. Labor Department reported that initial claims for unemployment benefits in the week ended April 17 came in at 547,000 on a seasonally adjusted basis, lower than expected and the lowest since the COVID-19 pandemic. The European Central Bank reiterated its ultra-loose monetary policy stance, but markets were unnerved by comments from ECB President Christine Lagarde on the timing of rate hikes, saying the bank wanted to keep pace with the Fed. The combined impact of the two news sent the euro sharply lower after a short-term rally, while the dollar index resumed gains and traded above the 91 level. Spot gold fell below $1,780 an ounce, its biggest one-day drop since April 12. Separately, President Joe Biden plans to raise the capital-gains tax rate on people earning $1 million or more to 39.6% from the current 20%, according to people familiar with the matter. After the news came, the three major U.S. stock indexes quickly plunged, U.S. bond yields fell.
The number of Americans filing new claims for jobless benefits fell last week for a second straight week to a new post-outbreak low, suggesting the labor market recovery is gathering pace and the April jobs report is likely to be strong.
Initial claims for state unemployment benefits for the week ended April 17 were 547,000, about 50,000 below expectations and a new low during the COVID-19 pandemic.
“Overall, I do think it’s consistent with the strengthening of the labor market. It feels like the economy is really starting to explode, “said Kevin Cummins, chief U.S. economist at NatWest Markets in New York. He noted that the April nonfarm payrolls report, due on May 7, could be equal to or better than March’s 916,000.
Some economists have said employment momentum could push the economy to more than 1 million jobs this month.
“A million seems like a reasonable number,” Cummins said. “But I don’t have an exact estimate. We have models that say we’re adding 525,000 jobs a month this year, and that’s probably too conservative.”
Thursday’s report was the second in a row that claims have been below 600,000. Initial claims for state unemployment benefits were revised up by 10,000 to 586,000 in the week ended April 10. That compares with a peak of 6.2 million claims in early April last year. The number has been on a downward trend since its peak last year, but remains high, falling below the pre-pandemic record only last week.
At the same time, the European Central Bank kept interest rates unchanged and said it would buy 20 billion euros of bonds per month under its asset purchase program, as before. There will be flexibility to buy bonds to prevent tighter financing conditions. The ECB said it would maintain its 1.85 trillion euro emergency bond buying programme (PEPP), which will continue until at least the end of March 2022, as previously.
At a subsequent press conference, ECB President Christine Lagarde said the recovery in global demand was supportive of the economy, but the rebound in inflation was due to temporary factors and underlying price pressures were low. Headline inflation is likely to pick up in the coming months, especially as market-based inflation continues to creep up gradually.
Ms Lagarde’s forecast for the eurozone economy suggests it may contract again in the first quarter, but surveys suggest growth in the second quarter, a recovery driven by domestic and global demand and a return to pre-epidemic output levels by mid-2022.
Ms Lagarde stressed that the ECB was not targeting exchange rates, but kept a close eye on the euro’s exchange rate. Ms. Lagarde also pledged that purchases of PEPPs have been increasing and will continue to do so, that there has been no discussion of reducing PEPPs and that it is too early to talk about tapering.
Ms Lagarde said the US and eurozone economies were not in sync, and the ECB’s policies would not be in sync with the Fed’s. Negative interest rates are an effective tool for providing stimulus and the results of a strategic review will be published in the autumn.
Axel Merk, chief investment officer at Axel Merk Investments, said the market was unnerved by Ms. Lagarde’s revelation about the timing of a rate hike when she said the ECB wanted to keep pace with the Fed, but that the two economies had different inflation tracks. Merk said, “Nothing substantial.”
Analysts at UniCredit said they were sceptical Ms Lagarde would be able to give any meaningful hints today and that the outlook was too uncertain for her to start guiding market expectations at this stage. A decision on what to do with PEPP after March 2022 is likely to be made in September.
Major currencies were mixed on Thursday as markets tried to digest comments from the European Central Bank on interest rate policy and fresh evidence of the strength of the US economic recovery.
The euro edged higher after an intraday surge, but retreated after the European Central Bank left its interest rate policy unchanged and left open questions about how it will withdraw stimulus when the economy recovers.
EUR/USD rose about 0.1 percent on the day after the ECB statement, briefly spiked to 1.2069 after Lagarde later said there were “signs of improvement” under the cloud of economic uncertainty, but quickly retreated 67 points to a fresh session low of 1.2002.
As the euro retreated, the dollar index rose about 0.3 percent to hit as high as 91.39.
‘The ECB is unlikely to rule out tapering in June, which may keep our bearish tactical bias on the euro unchanged,’ Citigroup analysts said.
Thursday’s currency moves were another example of how markets have been focusing on how quickly different economies will bounce back from the epidemic and how their interest rates will fluctuate.
The Canadian dollar surged on Wednesday after the Bank of Canada signaled it would raise interest rates next year and said it would scale back its asset purchase program. The statement marks the first time that central banks from the Group of Seven leading economies have moved towards withdrawing stimulus.
The market is now focused on next week’s Fed meeting and possible comments on how the central bank views future changes to its easy-money policy.
Gold posted its biggest one-day fall in more than a week as better-than-expected US jobs data dented safe-haven demand.
Spot gold fell 0.8 percent to $1,777.27 an ounce in early trading, the biggest drop since April 12.