US weekly jobless claims drop in latest week

Initial Jobless Claims measures the number of individuals who filed for unemployment insurance for the first time during the past week. This is the earliest U.S. economic data, but the market impact varies from week to week.

A higher than expected reading should be taken as negative/bearish for the USD, while a lower than expected reading should be taken as positive/bullish for the USD.

The number of new unemployment benefit applications in the U.S. dropped more than anticipated last week, easing concerns about a deteriorating labor market and suggesting a gradual slowdown is still on track.

For the week ending August 3, initial claims for state unemployment benefits decreased by 17,000 to a seasonally adjusted 233,000, according to the Labor Department on Thursday. This marks the largest drop in roughly 11 months. Reuters economists had projected 240,000 claims for the week.

The drop in jobless claims

The drop in jobless claims was a welcome shift after the unexpected surge the previous week, likely reflecting the diminishing effects of temporary motor vehicle plant closures and Hurricane Beryl. The previous week’s claims were revised slightly upward to 250,000 from 249,000.

Following the announcement, S&P futures rose about 0.7%, benchmark Treasury yields climbed back above 4%, and the U.S. dollar strengthened against other currencies.
Marc Chandler, chief market strategist at Bannockburn Global Forex, noted, "The talk of an imminent recession seems wide of the mark."

Investors reduced their expectations for a substantial Federal Reserve rate cut next month, with the likelihood of a 50-basis-point reduction dropping to about 60% from 70% before the release.

Reasons behind the drop

Claims have generally been rising since June, partly due to volatility from motor vehicle plant shutdowns and disruptions from Hurricane Beryl in Texas. Unadjusted claims decreased by 13,589 to 203,054 last week.

Claims fell sharply in Michigan and Missouri, states with a heavy presence of motor vehicle assembly plants which saw claims rise the prior week. Auto makers typically idle assembly lines in July to retool for new models, but the schedules are different for every manufacturer.

Over the past few weeks overall claims have been hovering near the high end of the range this year, but layoffs remain generally low. Government data last week showed the layoffs rate in June was the lowest in more than two years. The slowdown in the labor market is being driven by less aggressive hiring as the Fed's interest rate hikes in 2022 and 2023 dampen demand.

The U.S. central bank last week kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been since last July, but policymakers signaled their intent to reduce borrowing costs at their next policy meeting in September.

The government's monthly nonfarm payrolls report released last Friday indicated a significant slowdown in job growth for July, with the unemployment rate rising to 4.3%. This spurred concerns that the labor market might be weakening quickly enough to prompt aggressive measures from the Fed.

The report also revealed that the number of people receiving unemployment benefits after the initial week, a key indicator of hiring trends, increased by 6,000 to a seasonally adjusted 1.875 million for the week ending July 27, continuing an upward trend.

Stock market turned sharply positive after the release

Concerns escalated over the state of the labor market following last Friday’s nonfarm payrolls report, which showed an increase of just 114,000 in July. At the same time, the unemployment rate rose to 4.3%, triggering the so-called Sahm Rule that gauges recessions by measuring changes in the jobless rate.

Markets have been highly volatile since the release of jobless claims, with a huge three-day sell-off starting last Thursday that ignited worries of deeper troubles in the U.S. economy.
In turn, traders expect the Federal Reserve to begin cutting interest rates in September, with some even calling for an emergency intermeeting reduction to counter the recent weakness. Markets are assigning a strong probability of a half percentage point reduction for the first move and a full percentage point cut by the end of the year.

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