The 2020 coronavirus (COVID-19) pandemic unhinged capital markets and domestic economies around the globe. From Asia to the United Kingdom, economic contraction became the rule.
Amid lockdowns, quarantines and travel restrictions, day-to-day life underwent a dramatic transformation. Unfortunately for workers, businesses and investors, the world's labour markets experienced turbulence not seen since the Global Financial Crisis of 2008.
What Is Unemployment?
According to the Merriam-Webster dictionary, unemployment is the "involuntary idleness of workers." The term is synonymous with stagnant economic growth, poverty and a lower standard of living. As a general rule, unemployment grows during recessions and dissipates during expansions.
In order to monitor unemployment and the domestic labor market, regulatory bodies conduct studies of all types. A few of the most common are surveys of the actual labour force, participation rates and employment-to-population ratios. The United States Bureau of Labour Statistics views each area as follows:
- Labour Force: The total number of people who are currently working or searching for work.
- Labour Force Participation Rate: The percentage of the aggregate population that is working or seeking work.
- Unemployment Rate: The number of unemployed people as a percentage of the labour force.
- Employment Population Ratio: The percentage of the aggregate population that is currently working.
Of the above listed metrics, the unemployment rate is frequently referenced as a barometer of labour market health. While this is a go-to statistic for legions of active forex, futures, bond and equities traders, its derivation can vary from country to country. Exact definitions of what constitutes the "domestic labour force" and "unemployed" individuals often differ.
Unemployment rates are expressed as percentages to streamline comparative analysis. To illustrate their functionality, below are a few samples taken from International Labour Organisation (ILO) estimates from year-end 2019:
- United Kingdom, 3.9%
- France, 9.1%
- Germany, 3.2%
- Japan, 2.4%
- China, 4.4%
- Canada, 6.1%
- United States, 3.9%
- World, 4.9%
Unemployment rates are capable of fluctuating wildly with respect to region, nation, or macroeconomic cycle. When referencing these figures, it's important to remember that all statistics are subject to reporting and computation errors. It can be a challenge to craft a true apples-to-apples comparison when using unemployment rates exclusively as a labour market indicator.
Unemployment Spikes Amid COVID-19 Pandemic
According to the United Nations Labor Body, the COVID-19 contagion wielded harsh consequences upon the global workforce. As of early April 2020, 6.7% of all working hours and 195 million jobs worldwide were projected to be lost in the second quarter of 2020. The swift downturn in the international labour markets was predicted to be one of the largest on record and the product of a deep global recession.
The performance of the coronavirus-induced labour market wasn't much better in the States. U.S. Labor Department statistics showed that more than 26 million jobless claims were filed between 1 March 2020 and 16 April 2020. This figure contributed to analyst estimates of American unemployment to spike from sub-4% to between 15% and 20% in a little over six weeks. The sudden uptick in jobless claims was the largest witnessed since the 1930s (Great Depression era).
Given the extraordinary short-term uptick in unemployment, consensus estimates pointed to a dramatic downturn in global economic performance. The International Monetary Fund (IMF) called for a 3% reduction in worldwide GDP for 2020, with per capita output shrinking in 170 nations. Subsequently, calls for dramatic action from governments and central banks grew louder as the economic situation became dire.
Monetary Policy, Unemployment And The USD
Perhaps the greatest tools used to fight high unemployment rates are expansive monetary policies. Accordingly, central banks begin increasing money supplies through cutting interest rates, boosting interbank lending and acquiring government or private debt issues. Each of these activities promotes economic growth through the injection of liquidity to businesses and commercial enterprises.
In response to the exploding COVID-19 economic threat, the U.S. Federal Reserve (FED) took unprecedented action. During March 2020, the FED cut the Federal Funds Target Rate to 0% and launched "QE unlimited." In a matter of weeks, QE unlimited expanded the FED's balance sheet upwards of US$6 trillion. The result was a massive injection of liquidity into the global debt markets in an attempt to foster economic growth and mitigate the negative impacts of rising unemployment.
However, the immediate effects of the FED's actions on employment were muted. From 21 March to 18 April, the U.S. Labor Department reported record growth in jobless statistics. For the period, approximately 26.2 million Americans filed unemployment claims, accounting for roughly 16% of the aggregate labour force.
Despite bold actions by the FED and an unprecedented US$2.3 trillion government stimulus package, an ominous economic scenario began to take shape. Debate ensued throughout the financial community regarding the impact of FED QE and massive stimulus on the U.S. dollar (USD). A vast majority of prognostications fell into one of three categories:
- Inflation: An inflationary cycle is one where a basket of consumer goods becomes more expensive, thus decreasing the purchasing power of the domestic currency. Inflation has many drivers, including economic expansion and artificial increases in the money supply.
- Deflation: Deflation occurs when the price of a basket of consumer goods falls. It may result from sub-par economic growth, a sectoral downturn or from bank failures and wealth destruction. While deflation typically benefits consumers, it can hurt industry and investment.
- Stagflation: Stagflation is the combination of slow economic growth and rising inflation. It is especially devastating to consumers as a reduction in purchasing power accompanies high unemployment levels.
Ultimately, the long-term effects of COVID-19 fiscal policies on unemployment and the USD remain a topic of speculation. Research from the FED suggests that the odds of a deflationary cycle hitting the USD in the short-term are substantial. Conversely, many economists agree that inflation of the USD is unavoidable due to a robust increase in the money supply. Still, others maintain that the worst-case scenario of persistent stagflation is a probable outcome of the COVID-19 pandemic.
U.S. Unemployment Spikes To All-Time Highs
The COVID-19 contagion affected the global economy in an unprecedented manner. Mass lockdowns and travel restrictions brought commerce and industrial growth to halt. Shutdowns of manufacturing facilities and non-essential businesses led to widespread furloughs and layoffs. While short-term unemployment was expected to spike, the full extent was not known until the U.S. jobs report from April 2020 became official.
Record-Breaking Unemployment In April 2020
On Friday, 8 May 2020, several American labour market statistics were released to the public. Among the data sets was the official U.S. Unemployment Rate and Non-Farm Payrolls report for April. Consensus estimates predicted that both figures were to come in historically low. As reported by the U.S. Bureau of Labor Statistics (BLS), the damage to the American job market stood at record levels:
- Non-Farm Payrolls: This is a monthly summary of job gains or losses, exclusive of the agricultural sector. For April 2020, U.S. Non-Farm Payrolls came in at -20.5 million, a record month-over-month decline.
- Unemployment Rate: According to the BLS, U.S. unemployment rose to 14.7%, up 10.3% from March. This increase represented the largest on record.
In the aggregate, around 23.1 million Americans were considered to be unemployed during April 2020. This led to an uptick in the unemployment rate to the highest monthly value on record.
The dire labour market reports for April led to even more ominous projections for May. Several government officials went on record stating that the May U.S. unemployment rate was likely to grow near or above 20%.
Contrarian Market Action After Record-Low Unemployment Report
Conventional wisdom suggests that markets aren't fond of uncertainty. This wasn't the case for equities following the U.S. unemployment report for April. Risk assets caught significant bids, sending values higher for the 8 May 2020 session:
- Dow Jones Industrial Average (DJIA): The DJIA settled the day 440 points (+1.84%) higher at 24,372.
- Standard & Poor's 500 (S&P 500): Traders bid the S&P 500 north by 48.61 points (+1.69%) to a close of 2929.81.
- NASDAQ Composite (NASDAQ): Tech stocks saw bullish participation, driving the NASDAQ north 141.66 points (+1.58%).
One reason behind the positive action in U.S. stocks was that the markets had already "priced-in" a dreadful jobs report. Conversely, the USD experienced negative sentiment for the 8 May 2020 session. As forex traders contemplated the long-term fallout from a tanking U.S. labour market, the USD lost marketshare versus a majority of the majors:
- EUR/USD: The EUR/USD traded largely flat, gaining 3 pips (+0.03%) for the session.
- GBP/USD: Values of the GBP/USD ticked higher by 45 pips (+0.37%) on the day.
- AUD/USD: Despite a weak showing from gold, traders bid the AUD/USD north by 36 pips (+0.56%).
- USD/CHF: The Swiss franc gained marketshare as the USD/CHF fell 27 pips (0.28%).
- USD/JPY: As the lone bright spot for the USD, the USD/JPY rallied by 37 pips (+0.35%).
- USD/CAD: The USD/CAD posted an intraday bearish trend of 56 pips (-0.40%).
Note: Past performance is not an indicator of future results.
Among the primary reasons that equities rallied while the USD fell on 8 May 2020 was the potential for more FED QE and government stimulus. In subsequent days, debates regarding the FED adopting negative interest rates and a second US$3 trillion COVID-19 stimulus bill came to the forefront. Although most market participants expected unemployment to spike during April 2020, the dramatic reports acted as catalysts for fresh monetary and fiscal policy dialogue.
Summer 2020: Labor Market Recovery (August update)
Following the massive spike in pandemic-related unemployment of April 2020, most financial authorities expected the American labour market to extend its contraction. Both market analysts and economists issued dire warnings, suggesting that the U.S. unemployment rate was likely to balloon as 2020 progressed.
In a mid-May report, investment banking giant Goldman Sachs suggested that America's "real jobless" rate was to peak at 35% post-COVID-19. Additionally, the official unemployment rate was to average 10% for 2020 and hold above 8% through year-end 2021.
Although Goldman's figures were viewed by many as controversial, they did address the immense economic pressure created by the widespread COVID-19 shutdowns. However, despite consensus estimates for extreme levels of U.S. unemployment, figures for June and July showed record-setting improvements.
June 2020 Unemployment Report
According to the Bureau of Labor Statistics (BLS) June Employment Situation Report, the U.S. posted all-time highs in new job creation and monthly decrease in unemployment. Below are the highlights of the 2 July 2020 BLS report:
- For June 2020, 4.8 million jobs were added, a record high. The uptick brought the total for May and June to 7.5 million jobs added―the greatest two-month rally in history.
- Aggregate unemployment fell by 2.2% to 11.1% for June, extending two-month gains to 3.6%.
Although the 2 July 2020 BLS jobs report shattered expectations, the USD traded mixed across the majors. For the session, participation was moderate ahead of the 4 July Independence Day holiday weekend:
- EUR/USD: The EUR/USD traded down slightly, losing 11 pips (-0.10%) for the day.
- GBP/USD: Sellers gained a slight edge, with the GBP/USD falling seven pips (-0.06%) for the session.
- USD/CHF: Amid mild participation, the USD/CHF fell by five pips (-0.05%).
- USD/CAD: Rates of the USD/CAD slid 22 pips (-0.16%) as the loonie appreciated vs the greenback.
- USD/JPY: The USD/JPY put in a tight daily range, rallying 25 pips (0.02%).
- NZD/USD: Rates of the NZD/USD rose by 33 pips (0.52%) as traders engaged the Kiwi instead of other major pairs.
In contrast to the relatively quiet forex action, U.S. equities were boosted significantly by the 2 July 2020 BLS report. For the session, the Dow Jones Industrial Average (DJIA), S&P 500 and NASDAQ all extended bullish weeks, gaining 4%, 4.6% and 3.25% respectively.
Note: Past performance is not an indicator of future results.
July 2020 Unemployment Report
Comparatively speaking, the July 2020 BLS Employment Situation Report brought fewer headlines than the June installation. Released on 7 August 2020, the report signalled further jobs growth but at a much smaller degree:
- Total Non-Farm Payrolls rose by 1.8 million for July 2020.
- The U.S. unemployment rate fell by 0.9% to 10.2% for the month.
- July's jobs gains cut aggregate COVID-19 job losses to 10.6 million beginning in February 2020.
In contrast to the forex action from 2 July 2020, the 7 August 2020 session was much more robust. The greenback posted big gains across the majors as the extended unemployment gains prompted a broad-based rally:
- EUR/USD: The EUR/USD trended south, losing 93 pips (-0.78%).
- GBP/USD: Forex traders favoured the short side of the GBP/USD, sending rates plummeting by 93 pips (-0.71%).
- USD/CHF: The greenback rallied versus the safe-havens, as evidenced by a 25 pip gain (0.28%) against the Swiss franc.
- USD/CAD: Bidders sent the USD/CAD higher by 75 pips (0.57%) following the strong jobs figures from July.
- USD/JPY: Rates of the USD/JPY spiked by 36 pips (0.34%) for the session.
- NZD/USD: The NZD/USD was the forex's big mover on 7 August 2020, with values plunging 91 pips (-1.37%).
Note: Past performance is not an indicator of future results.
Even though the USD posted solid gains versus the majors following the 7 August 2020 unemployment report, valuations remained down dramatically from March's highs. From mid-March to the second week of August 2020, the USD Index fell by nearly 9%.
While U.S. unemployment rates consistently decreased during this period, the USD struggled to hold marketshare. Primary reasons for the dollar's weakness were the implementation of extensive Fed quantitative easing (QE) and the injection of multi-trillion dollar government stimulus.
Even though colossal FED QE and government stimulus suggested USD weakness, the impact was quite the contrary. As the COVID-19 contagion exploded, the Greenback gained marketshare versus other global majors. From 1 March 2020 to 23 April 2020, the U.S. dollar Index (DXY) rallied above 100.00 on several occasions―a level not seen since September 2016. At least in the short-run, the USD proved to be a safe-haven asset and did not experience chronic devaluation as global unemployment levels exploded.
History shows that massive QE and stimulus packages eventually lead to inflationary cycles for the USD. These challenges are typically combated by the periodic raising of interest rates and "unwinding" of FED holdings as economic conditions improve.
However, the impact of an unprecedented spike in unemployment will largely depend on the duration of the COVID-19 pandemic. If short, the USD and forex majors will stabilise relatively quickly; if long, the implications will vary according to each nation's handling of the economic fallout. As of this writing (late April 2020), the situation remains fluid.
This article was last updated on 21 August 2020.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…