News & Analysis

US: pressure on Fed rises as jobs report comes in piping hot

Going into today’s data release, the White House had warned not to overinterpret the US labour market report because of seasonal impacts and Omicron. However, with the US adding nearly four times as many jobs to the labour market as initially expected, markets were tasked with the impossible. This was especially the case as the two-month payroll was revised upwards to 709,000 extra jobs, indicating a hotter jobs market than expected. This immediately led to a leg lower in EURUSD despite the adjustment to the more hawkish European Central Bank expectations from yesterday, while the 10-year yield moved up above 1.90% to reach pandemic-highs.

 

EURUSD moves to session lows after US adds 467k nonfarm payrolls while yields move higher

Looking at the details of the report, the unemployment rate ticked up slightly to 4.0% from 3.9% previously, while the average hourly earnings rose by 0.7% MoM vs the estimated 0.5%. Private payrolls rose by 444,000, over 12 times higher than the expected 35,000 gain, while the Nonfarms rose by 467,000 vs 125,000 expected. At the same time, the participation rate rose higher to 62.2% vs 61.9% in December, which also explains why the unemployment rate ticked up.

The participation rate was a big area of concern for the US, as one of the subcategories that had continued to show slack while other areas of the labour market improved.

This meant that the recovery in the unemployment rate held less value as it simply meant that less people were actually in the labour force, which drove the rate down. In today’s data, however, that slack seems to have dissipated, which leaves markets with concerns around whether the economy is running too hot.

Like officials from the White House and the Federal Reserve warned, one data point does not make a trend. However, if the labour market is running this hot amid diminished but still evident virus concerns, this begs the question of what the report would have looked like without Omicron being a factor, and thus what the figures may look like over time as virus concerns fade.

This will place increased pressure on the Federal Reserve to tighten policy quicker and more aggressively, as markets are already pricing in an acceleration in short-term tightening.

 

Market implied Fed rate (1Y1D frd cash rate) ticks up as expectations around policy tightening increase

Canada: Despite risks, the Canadian job market continues to add workers

January’s labour force survey was always going to be bleak given the arrival of Omicron in Canada and the subsequent provincial lockdowns in Ontario and Quebec. However, despite this major caveat, along with the fact that job losses were concentrated in these provinces (-146K in Ontario, -63K in Quebec), in part-time employment (-117.4K), and in health sensitive industries (-223K drop in service sector employment), today’s net employment reading from Canada was a difficult one for CAD bulls to swallow. Employment in Canada contracted by over 200,000, almost double the median expectation. The decline in employment during the latest Covid wave is synonymous with Delta’s impact back in January 2021 when 207k jobs were lost and highlights that even though growth conditions may be more robust to a deterioration in the health backdrop than before, the labour market remains highly sensitive to lockdown conditions.

The impact today’s negative reading had on Canadian assets was only exacerbated by the strong US nonfarm payrolls release for the same time period.

The loonie is currently trading nearly a percentage point lower against the dollar with USDCAD eyeing the 1.28 level despite WTI sitting over 2% higher on the day at $92 per barrel.

 

USDCAD spikes as divergences in labour market data prove difficult to ignore

Although the Omicron hit to the Canadian labour market was significant, as highlighted by January’s employment data, we don’t believe it vindicates the Bank of Canada’s decision to hold rates. Employment in these industries has been quick to recover after previous waves, and with growth conditions strong heading into the Omicron surge and lockdown measures proving more limited, it will only be a matter of months before the labour market starts to fire on all cylinders again. Employment is likely to pick up quickly, especially in food and accommodation services as indoor dining opens back up in Ontario and Quebec, however, hours worked may lag by a few months.

We don’t think today’s labour market data will derail the Bank of Canada from hiking 50bps in March’s meeting.

 

Canadian employment losses were concentrated in health sensitive

 

Authors: 
Simon Harvey, Head of FX Analysis
Ima Sammani, FX Market Analyst

 

 

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