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Mixed North American Data Demolishes Dollar Gains

Karl Schamotta December 7, 2018

The United States created 155,000 jobs last month, and the unemployment rate held near a historically-low 3.7 percent – well within the parameters needed to justify a December rate hike, but weak enough to give the Federal Reserve some breathing room in early 2019. Markets had expected a 200,000-position headline print, with the unemployment rate staying flat.

Notably, 27,000 new jobs were generated in the manufacturing sector – contradicting fears that a trade-related slowdown could impact growth. The world’s largest economy has now created jobs for a record 98 consecutive months – and cannot create jobs at a rate which outpaces population growth forever.

The closely-watched average hourly earnings number rose by 6 cents, equating to a 3.1 percent gain on an annualized basis. This matched market expectations in staying near October’s levels.

As the last non-farm payrolls report before the Federal Reserve meets in December, today’s numbers will act to solidify odds on a rate hike, while also reducing the need to accelerate monetary tightening in 2019.

Chairman Jerome Powell described the labor market as “very strong” while delivering a bullish outlook on the economy at a housing conference in Washington yesterday, and in recent speeches, voting members of the central bank’s rate-setting committee have worked assiduously to stay on-message, keeping market expectations well-anchored in the near term.

2019 could be different however – comments from non-voting Fed officials this week would suggest that they are moving in an increasingly-cautious direction, with softening inflation, falling oil prices, and slightly-weaker employment growth helping to put fears of an economic overheat on ice. This means that the central bank could take its foot off the gas in the new year, communicating more dovishly, while shifting away from the predictable path of quarterly hikes it has been on for most of the past two years.

With risk appetite returning and monetary tightening expectations falling, the dollar is trading sharply lower against its major counterparts – and in an unexpected twist, Donald Trump’s Twitter feed isn’t tilting against bullish market participants. Ignoring turmoil arising from the arrest of Huawei’s chief financial officer a few days ago, the President continues to express optimistic views on a trade deal with China – suggesting that a ceasefire in the trade wars could hold.

Here in Canada, employment rose by 94,000 in November, largely driven by gains in full-time work. This smashed expectations that had been set near the 10,000 mark, and may mark a historic record – our data suggests that a 94,000-position print in 2012 was the previous high.

Gains were well-distributed across the country’s economic sectors and geographies, with a surprising 23,500 jobs added in the oil price-dependent province of Alberta. The unemployment rate fell by 0.2 percentage points to 5.6 percent – the lowest level on record.

Wage growth slowed to 1.7 percent, suggesting that an expanding number of workers is helping to keep inflationary pressures in check.

One can never read too deeply into a notoriously-noisy Canadian employment report, but coming after a week in which central bankers expressed serious concerns about the economy, today’s data should keep January rate hike expectations alive -although we continue to consider a move before April an unlikely possibility.

This is providing some much-needed respite for Canadian dollar bulls, kicking the currency upward from critical support levels that had been breached earlier in the week – with a 5-percent rise in oil prices helping to provide momentum.

A meeting between the Organization for Petroleum Exporting Countries and its allies is set to conclude today in Vienna, and reports are suggesting that the group has agreed to cut production by 1.2 million barrels per day – more than had been expected a few hours ago.

Going into the negotiations, Iran (under the threat of American sanctions) was seeking an exemption, Russia (sheltered by a weak ruble) was reluctant to trim its output, and Saudi Arabia (under the threat of American sanctions for different reasons) seemed unwilling to put itself in the political firing line by committing to a sizable reduction – but in the Great Game that defines Middle Eastern and Russian oil politics, nothing is predictable.

Bottom Line: Strength exhibited in today’s jobs data serves to illustrate a continued disconnect between Streets Wall and Main. Stock markets, commodities, and risk-sensitive currencies have suffered massive losses in recent weeks as traders positioned ahead of an expected slowdown – ignoring continued robust growth and low unemployment in the real economy. It may appear that markets are seeing the glass as half-empty, but history would suggest that turbulence in the financial markets can impact the all-important credit cycle that drives longer-term economic outcomes – so the tail may yet wag the dog.

Karl Schamotta
Chief Market Strategist

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