News & Analysis

US: Continued drop in unemployment rate despite lower payrolls

Expectations for today’s payrolls data were high after multiple sell-side forecasters revised their projections for the net employment figure upwards following the higher ADP and Homebase data from earlier in the week.

The payrolls number of 199k, therefore, came as a disappointment to markets who expected over 400k new jobs added. However, the unemployment rate fell by more than expected to 3.9% vs the consensus of 4.1%, which similar to the November reading highlights that there still is a large discrepancy between the household and producer survey – in comparison to the payrolls data, the household survey showed 483,000 less unemployed people in December.

Going into the release, an area of concern for the US labour market recovery was the participation rate which has failed to recover as fast as the unemployment rate over the last months. This point was stressed again this time around, as the participation rate remained steady at 61.9% while the unemployment rate dropped lower.

The lower activity in the US labour market is expected to rebound over the course of 2022 as wages rise and health care constraints ease, while at the same time, excess household savings should gradually decrease and Covid concerns diminish.

For now, however, these dynamics weren’t visible in the December data release. Despite the negative surprise in the net employment data, signs of limited slack in the labour market are beginning to appear in stronger wage growth data. This supports the argument as outlined by some Fed members in the December meeting minutes that the labour market has in fact reached the Fed’s target for lift-off, while the lack of response in the participation rate suggests that Bullard’s argument of the structural decline in participation may, in fact, be correct.

For markets, today’s release was a bit of a head-scratcher and arguably a disappointment at the same time given the discrepancies in the data and absence of the expected bang that would confirm market expectations of a March rate hike by the Federal Reserve.

While the US dollar went mildly offered upon the release, the overall currency impact was rather limited despite the move higher in the 2Y and 10Y Treasury yields. Traders are likely awaiting more accurate data on the impact of Omicron on the US labour market and what Q1 employment looks like before building long USD positions on an aggressive hiking profile.

 

EURUSD ticks up higher after US jobs report, but overall moves remain limited as the data is mixed

Employment in the US remains below pre-pandemic levels despite the sharp drop in the unemployment rate

 

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

Risks heading into today’s jobs release were skewed to the downside for the loonie as many expected December to show the tipping point for the Canadian labour market after months of elevated employment increases. However, December saw net employment outstrip expectations yet again as the Canadian economy added 54.7k jobs relative to expectations of an increase of just 25k.

The larger than expected employment increase helped drive the unemployment rate lower to 5.9%, levels that the economy was averaging in the years up to the pandemic. The net employment figure only shows one side of the story, however. Underlying metrics of the labour market were mixed. On the one hand, full-time employment rose by a staggering 122.5k while part-time employment fell by 67.6k.

This suggests businesses are opting to fill staff shortages by rotating employees into more fixed hour contracts.

While on the other hand, total hours worked fell by 0.3% for the first time since June 2021, suggesting momentum in the labour market recovery towards the pre-pandemic unemployment rate of 5.6% is slowing, and hourly wage growth undershot expectations.

Given that the arrival of Omicron in Canada resulted in the tightening of restrictions after the December jobs data reference week of December 5th to 11th, the mixed readings in December’s jobs report didn’t wholeheartedly feed into CAD strength and a further rise in front-end Canadian bond yields.

With evidence of companies laying off workers in January due to the implementation of vaccine mandates, and the early evidence of food and accommodation hiring contracting in December as the health backdrop started to deteriorate, we expect to see January’s jobs report to show a contraction in both employment and hours worked as the demand outlook worsens and staffing disruptions increase due to isolation requirements.

These expectations are likely being shared in the pricing of Canadian assets following the data release and can partly explain why the loonie struggled to hold onto its initial gains.

 

Contractions in accommodation and food services along with health care employment show the early signs of the impact Omicron and vaccine mandates will have on Canada’s labour market

 

Author: Simon Harvey, Senior FX Market Analyst

 

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