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Market Wire
North American Jobs Reports Keep Central Banks Sidelined

Karl Schamotta January 10, 2020

145,000 jobs were created in the United States last month – slightly below expectations, but enough to assuage fears of an outright downturn at the end of 2019. The number follows an exaggerated November surge, in which headline job growth topped a (revised) 256,000.

The headline unemployment rate held at 3.5% – near a 65-year low – while a measure that includes discouraged and underemployed workers fell to 6.7%.

The economy continued to exhibit bifurcation, with the larger, more stable services sector outperforming manufacturing by a wide margin. 12,000 manufacturing jobs were lost – but the sector drives less than 9% of payrolls, meaning that the headline number remained strongly positive.

Overall, the United States added 2.1 million jobs in 2019 – the weakest since 2011, but impressive at this point in an extremely-geriatric business cycle.

Average hourly earnings rose 2.9% – slightly lower than the consensus 3.1%. This but this is partly related to an unusually large gain posted in December 2018.

This data does not support the case for further monetary easing in 2020 and should relieve pressure on the Federal Reserve’s bill-buying program, but weakness in wage inflation also doesn’t paint a compelling picture for the hawks on the central bank’s rate-setting committee. The yield curve remained stable post-release, and the US dollar held firm, up slightly against its major counterparts on a full-week basis.

Across the 49th parallel, Canadian employment rebounded, with 35,200 jobs generated in December – helping to offset a combined 73,000-position loss in October and November. The unemployment rate fell to 5.6%, with population growth outpaced by a 320,300 rise in the employment ranks through the full year.

Markets had expected a 25,000-position print, with the unemployment rate falling back to 5.8%.

2019 employment growth was driven by the services-producing sector, with 367,000 positions created while 47,000 jobs were lost in tangible goods production.

Just as in the US, wage growth disappointed, decelerating to 3.8% on a year-over-year basis, down from the 4.4% posted in the prior two months.

This will keep expectations for a move on interest rates or a material shift in language very low ahead of the Bank of Canada’s next meeting on January 22. With wage growth slowing and signs of an economic deceleration accumulating, market participants are retaining an easing bias, with slightly less than a full 25-basis point cut priced in for 2020.

Elsewhere, China has confirmed that its top trade negotiator, Liu He, is heading to Washington next week, providing more evidence a “Phase 1” agreement will be signed. This is helping to support global risk appetite – and the yuan in specific, which has quietly risen toward a five-month high.

With central banks on the sidelines, abundant liquidity flowing through markets, geopolitical tensions dissipating, and the trade war narrative fading into the background, downward pressure is being exerted on implied volatility levels in the currency markets – and yield-seeking behaviour is returning. Something resembling the late-nineties bout of “irrational exuberance” has taken hold, and imbalances could widen in the months ahead – meaning that participants should tread carefully.

Karl Schamotta
Chief Market Strategist
@vsualst

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