Market Brief: Positive Jobs Reports Bolster Risk Appetite

The US job creation engine slowed in January, but revisions to November and December numbers illustrated continued strength in labour markets, helping keep the Federal Reserve firmly sidelined. According to data just released by the Bureau of Labor Statistics, just 143,000 jobs were added in the month—undershooting the 175,000-position consensus forecast—but December’s headline print was revised higher to 307,000 from the 256,000 originally estimated, and November’s number jumped to 261,000 from 212,000, lifting the three-month average to 237,000. The unemployment rate slipped to 4.1 percent, and average hourly earnings climbed 0.5 percent month-over-month, accelerating from the pace set in the prior month and rising 4.1 percent year-over-year.

As economists had expected, annual benchmark revisions were significant. Adjustments to previously-published data subtracted 589,000 jobs from cumulative payroll growth between April 2023 and March 2024, lifted population estimates by 2.9 million, and added 2 million to total household employment.

The dollar is holding steady after an initial knee-jerk selloff and Treasury yields remain well-supported across the front of the curve as traders look through January’s noisy print to see a still-robust employment picture. The euro, pound, and yen are all down incrementally, but price action looks relatively sluggish—relative, at least, to the typical reaction to a non-farm payrolls report.

Canada generated more jobs than anticipated in January, suggesting that the economy was beginning to improve before last week’s tariff shock and helping the loonie gain altitude. 76,000 new positions were added in the month, hours worked rose 0.9 percent, and the unemployment rate fell to 6.6 from 6.7 percent in the prior month. Consensus estimates had pointed to just 25,000 new hires, with the unemployment rate seen rising to 6.8 percent. The average hourly wage for permanent employees—closely watched by monetary policymakers—rose 3.7 percent from a year earlier, down from an upwardly-revised 3.8 percent in the prior month. On a three-month basis, 147,000 full-time positions were added, with another 64,000 landing in part-time roles.

Markets still expect the Bank of Canada to cut twice more this year as ex-shelter inflation undershoots the central bank’s target, household consumption remains weak, and the economy faces sustained headwinds generated by Donald Trump’s tariff threats. This should—all else equal—leave the gap between policy rates in Canada and the United States near historically-wide levels, keeping gains in the exchange rate capped. But all else is rarely equal, and we expect a gradual slowing in the US economy to translate into a modest reappraisal of the Federal Reserve’s policy path later this year. If that plays out, interest rate differentials could narrow slightly, helping support a modest strengthening in the loonie against the dollar.

Treasury Secretary Scott Bessent yesterday noted that an “accumulation of large surpluses” outside the United States provided evidence of imbalances in the global economy, suggesting that other countries are intervening in currency markets, repressing interest rates, and using trade restrictions to achieve unfair advantage. In an excellent interview with Bloomberg’s Saleha Mohsin, Bessent called China the “most imbalanced, unbalanced economy in the history of the world,” saying that the country is trying to export its way out of a deflationary spiral, and warning “We can’t allow that”.

Bessent is correct**. No economy in history has run savings and consumption imbalances as extreme as China’s for as long as China has: except, perhaps, the United States itself. Even as the country’s share of global gross domestic product has slipped from 36 percent in 1970 to 24 percent in 2023, its share of the world’s household spending has barely changed. For a variety of reasons—including mercantilist policies by geopolitical adversaries, but also the dominance of the dollar in international markets, cross-aisle support for fiscally-irresponsible government spending, and a tax structure that incentivises the accumulation of debt—the US was spending beyond its means long before China’s emergence as a global manufacturing superpower, and it continues to do so.

The United States is both a victim and offender when it comes to global imbalances. To change this, leaders will have to couple their trade-adjustment efforts with painful policy choices that increase domestic savings rates and reduce the country's role in absorbing global capital flows.

*For a deep dive into the revision process, see Jed Kolko's blog post here and Guy Berger's here

**Perhaps he has (anonymously) attended our presentations on global imbalances and China in the past***.

***This is in jest, but is just our less-than-subtle way of saying "told you so".

Economic Calendar