News & Analysis

Since Wednesday’s Fed and Treasury announcements, the market’s focus has moved from pricing the higher for longer narrative to predicting rate cuts and subsequently locking in what looks to be a top in yields. This was merely supported by data out of the US, which suggested that the economy was cooling considerably at the start of the fourth quarter. In FX markets, this saw the dollar sell-off across the board, primarily against risk and yield sensitive currencies as the two pillars of the dollar’s recent rally– US exceptionalism and the rise in longer-term yields– were eroded. Nevertheless, with the Fed suggesting that higher bond yields could substitute for a rate hike, inferring that the opposite was also true, we were sceptical that the momentum lower in yields could be sustained without a dramatic cooling in the US data.

This immediately pushed the focus for markets onto October’s Nonfarm payrolls report, with the main emphasis on the net employment figure seeing as Chair Powell pointed to the level of labour demand as being a key variable in their decision to hike in Q4 or not.

At 150k, however, today’s net employment figure considerably undershot expectations, which sat at 180k. Furthermore, September’s bumper month of 336k was also downgraded by -39k to 297k, with August’s data also revised lower by -62k. With the rest of the US jobs report reading soft, markets got the green light to continue purchasing high-yielding US debt, reduce USD longs, and bring forward pricing of the Fed’s easing cycle. This outcome wasn’t just specific to the US, however. Canada’s October jobs report came in similarly soft, with net employment gains concentrated in part-time positions and struggling to keep pace with population growth. This confirmed our view that the BoC was done hiking and that markets were previously underpricing the risk of monetary easing commencing in 23H1.

While the more aggressive sell-off in US rates meant USDCAD still fell on the release, the weaker Canadian jobs report meant the loonie underperformed its G10 peers.

The dollar index drops alongside Treasury yields as markets bring forward expectations of the Fed’s easing cycle 


USDCAD drops as the broad dollar sells off, but weakness in the Canadian jobs data means the loonie underperforms in the everything rally 

Nonfarms report reads soft, greenlighting a further drop in US yields on earlier easing 

While the impact of the UAW strikes suggested October’s Nonfarm payrolls was always likely to be softer than its Q3 average, big data pointed towards reading in the region of 180-200k even once accounting for the 33k drag from the industrial action. Nevertheless, markets were jolted by just how soft the payrolls report was, with a print of just 150k in October and a cumulative -101k downgrade to the prior two months.

Sitting considerably below the 12-month and 3-month averages of 258k and 227k respectively, today’s reading suggests that the cooldown in labour demand that the Fed were looking for as confirmation that monetary policy doesn’t require further tightening is materialising.

The details of the report were also soft. Employment grains were largely concentrated in health care (+58k), government (+51k) and social assistance (+51k). Job growth largely stagnated in consumer-oriented industries, despite strong consumption growth year-to-date and suggestions that seasonal hiring would occur earlier this year due to previous experiences of hiring difficulties. Meanwhile, average hourly earnings fell from 0.325% to 0.206% MoM, and although the non-supervisory category showed more notable strength at 0.344% from 0.31% MoM, this saw the 3-month annualised rates fall from 4% and 3.8% to 3.2% and 3.5% respectively. At these levels, wage growth is almost consistent with a 2% inflation target. Furthermore, hours worked fell back a tenth to 34.3, the bottom of its 2011-2019 range. The household survey, which is considerably more volatile due to falling response rates, also exhibited signs of weakness. Here, the labour force fell by -201k, below the 348k contraction in employment. This saw the unemployment rate tick up from 3.8% to 3.9%. Notably, the impact of the UAW strikes are redundant in this measure.

Canadian labour market also eases, which is unsurprising given the lack of growth

Labour demand in Canada once again failed to keep up with the rapid pace of population growth in October (+84.6k and +57.8k in terms of labour force participation), an outcome that is unsurprising given the economy is essentially flatlining and is, in our view, on the precipice of a mild recession. This meant the 17.5k increase in net employment corresponded with a 0.2 percentage point uptick in the unemployment rate, which at 5.7% now sits at its highest level since the sustained reopening of the Canadian economy 22–months ago. While this tells most of the story when it comes to the state of the Canadian labour market, it is worth noting that the details of the report were also soft. Job gains were concentrated in part-time roles, with full-time employment contracting by -3.3k.

Meanwhile, job losses were prominent in consumer-focused industries and total hours worked was also flat, suggesting that growth conditions likely contracted further in the fourth quarter after flat-to-mildly negative growth in the middle quarters of 2023.

The re-emergence of slack in the labour market is also starting to weigh on wage growth, which fell from 5.2% to 5% YoY. This should translate into a continued decline in the BoC’s measures of core inflation, which if confirmed would support our view that the BoC has now concluded its hiking cycle and will now rely on below potential growth in guiding inflation back to target. This moves the market’s spotlight onto when the next change in policy will occur. In this case, that is an interest rate cut.

In our view, the BoC is unlikely to ease before Q2 next year, but there is a risk that if growth conditions crater and lead to a more substantive unwind in the labour market, thus weighing on wage growth and the consumption outlook for 2024, that the BoC is forced to ease policy back to neutral as early as Q1.




Simon Harvey, Head of FX Analysis


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