The broad consensus coming out of the FOMC meeting on Wednesday was this most recent 25bp rate hike would be the last of this cycle.
Although the Fed did not explicitly signal that a pause was imminent at the June meeting, the implication in both the written statement and Chair Powell’s press conference was clear: the Fed would really like to finish hiking, provided that the data allowed. This narrative may well have failed its first major test today, with the release of nonfarm payrolls data. This latest release showed a labour market and wage pressures that continue to remain robust, suggesting that significant core inflationary pressures remain persistent in the US economy. However, despite this upside surprise, the market reaction in overnight swaps has largely taken this latest development in its stride, suggesting that a greater accumulation of evidence may be necessary to really shift expectations.
Despite pre-release expectations for the headline change in nonfarm payrolls to print 185k this month, the reading managed to come in stronger than expected, showing an increase of 253k for April.
This was somewhat offset by a downwards revision to the March release from 236k to 165k, but this serves to make the upward jump in the current figures even more alarming for policymakers concerned with labour market strength. If they were to go looking for better news elsewhere in the release, they were unlikely to find it. Compounding the robust headline figure was a drop in the unemployment rate to a multi-decade low of 3.4%, down from the prior month’s reading of 3.5% and against an expectation for it to increase. Wage growth too was stronger than expected increasing to 0.5% MoM, up from 0.3% in March, and almost double the level typically seen as consistent with stable 2% inflation.
US job growth is on track to come in twice as strong as a typical year
Similarly to the US, Canadian jobs also surprised to the upside, coming in at 41.4k, more than double the expected number of 20k.
This figure didn’t just beat expectations for softer growth, but accelerated from March’s print of 34.7k. This now marks seven consecutive months in which the data beat expectations, which may lead the Bank of Canada to consider abandoning its conditional pause at 4.5% should CPI inflation also accelerate on May 15th.
Despite the acceleration in job growth, there is reason to partially discount today’s increase, namely that it was entirely driven by part time work.
Part time jobs typically pay less per hour than full time work, and combined with the fewer hours worked, lead to less upward pressure on wages. Part time jobs rose by 47.6k in April, in contrast to the -6.2k loss in full time employment. The Bank of Canada is, as with the Fed, focused on domestically-driven services inflation, which has been pushed upward by robust consumption growth and supported by wage increases. To that end, hourly wages for permanent employees held steady at 5.2% YoY, although economists had expected this to fall by 4 tenths of a percent.
Job growth accelerates in Canada, beats expectations for the seventh straight month
Only four of sixteen industries had statistically significant increases to employment, notably wholesale and retail trade (+24.4k), transportation and warehousing (+16.5k), information, culture and recreation (+16.1k), and educational services (+14.5k).
To the downside, business, building and other support services (-14.0k) was the only industry where job losses were statistically significant. High-paying industries like finance and professional services also saw net employment decline, but StatCan reported that these changes did not meet the threshold of significance.
FX markets visibly reacted to the data, although the reaction was muted compared to what you could expect from data surprises of this magnitude.
The broad dollar index immediately rose by 0.3% and consolidated at the new equilibrium level, and while the knee-jerk reaction saw the dollar also outpace the loonie, following some volatility, USDCAD fell by -0.2% within the hour subsequent to the release. Yields rose across the curve in both the US and Canada, with Canadian yields managing to slightly close the gap between their American counterparts. In the US, the 2Y rose by 7bps, while the 10Y rose by 6bps. In Canada, meanwhile, the 2Y was up 9bps on the day, and the 10Y was up 10bps. Money markets reacted primarily by pricing out a left tail risk of cuts. Overnight swaps and Fed funds futures now broadly expect no change to Fed policy in June, having priced out a roughly 10% chance of a cut. In Canada, swaps still view a continued pause as the most likely scenario, but are pricing another hike as the key risk with a 13% probability.
Jay Zhao-Murray, FX Market Analyst
Nick Rees, FX Market Analyst