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USDJPY surged from a recent low around 110.80 to almost 111.80 Thursday on U.S. debt limit temporary fix and lower than expected jobless claims. But USDJPY was also undercut briefly as magnitude 6.1 earthquake hits near Tokyo; shakes capital-positive for JPY as Japanese fund inflow increases generally in such crisis. In any way, on mid-Thursday, Dow Future soared, USD surged and Gold slips on the fading concern of an imminent U.S. default after Senate Majority Leader Schumer confirmed that a short-term debt-limit deal has indeed been reached with Republicans, led by Senate Minority Leader McConnell and the official vote will take place soon: "I have some good news---we've reached agreement to extend the debt ceiling through early December”.
As per reports, the political deal will raise the debt limit by $480B - the figure that U.S. Treasury says is required - to extend the deadline until 3rd Dec’21. This will give Democrats much-needed time to negotiate with Manchin & Co for Biden’s Build Back Better plan ($3.5T human infra stimulus) and also whether Manchin permits adequate debt limit hikes till at least 2022 through the budget reconciliation process. Also, Biden may try to get the bipartisan stamp on both BBB and post-December debt limit extension by negotiating with like-minded Republicans (at least 10) or even with McConnell directly.
The U.S. needs to fix this yearly drama of debt limit by suspending the same permanently; no other comparable economy may have such a ‘stringent’ debt limit and yearly political saga. Such lingering political brinkmanship is eroding the credibility of the U.S. and is also affecting its sovereign rating/outlook as well as USD. The status of USD as a global reserve currency would be at great risk if there is a prolonged repetition of political drama in the coming days for the debt limit extension/suspension issues post-Dec’21. The debt limit is being used as a political tool by both parties (Democrats-Republicans) over decades, even though there is virtually no other option for the U.S. to repay old debt with new debt (like the Ponzi scheme).
The U.S. is now paying almost 127% of its revenue as mandatory spending including almost 10% as interest (against China’s 6%, Europe’s 5%, and Japan’s 16%). Thus keeping inflation low is of utmost importance; otherwise, bond yield is bound to surge, causing higher borrowing costs for the AEs, which traditionally enjoy very low borrowing costs. Thus all major global central banks are now in a dilemma over rising inflation (whether transitory or not) and sustainable economic/employment recovery; it’s the stagflation-like scenario. Also, the rapid shift towards green energy aspirations without an alternative model ensured lower capex for fossil fuel (oil, natural gas, etc), resulting in lower supplies and higher demand and uncontrolled energy inflation.
Fed is set for liftoff by Dec’22 after the completion of QE tapering by June-Sep’22. Now the question is whether Fed will opt for one or two rate hikes in H2-2022. Fed is already behind the inflation curve. Thus Fed will primarily judge the maximum employment mandate for its liftoff decision. On Thursday, apart from the U.S. debt limit aga, all focus was also on U.S. jobless claims, which serves as a proxy for the unemployment trend ahead of Friday’s NFP job report for September.
The U.S DOL flash data shows the number of Americans filing initial claims for unemployment benefits (UI) slips to 326K in the week ending 2nd October, from upwardly revised 364K in the previous week, lower than the market expectations of 348K and the lowest in last 3-weeks. The prior week figure of 364K was also the highest in 7-weeks.
The continuing jobless claims in the U.S., which measure unemployed people who have been receiving unemployment benefits for a while (more than a week under UI), further dropped to 2714K (fresh post COVID low) in the week ending 25th September, from an upwardly revised 2811K a week before and below the market expectations of 2780K.
The number of Americans applying for financial help from the PUA scheme, which covers uninsured workers that do not qualify for initial claims (under UI), increased to 23.453K in the week ending 2nd October, from a revised 17.687K in the previous period.
Overall, almost 7000K uninsured workers have lost PUA benefits since the 6th Sep expiration date. But it appears that still, 42-states have also extended some form of PUA benefit. In any way, those 7M uninsured workers, mostly related to low-paying jobs in leisure & hospitality should look for jobs actively (unless they have changed to the full-time trader in Bitcoin!). Thus the Sep-Dec’21 NFP job report may be interesting, which may decide Fed’s pace of QE tapering as well as liftoff in H2-2022. Also, the progress of COVID vaccinations among vaccine-hesitant workers will be a factor, which may gather momentum in the coming days (when such hesitant workers feel that without vaccination, they will not get any physical work).
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