Market Brief: US Job Market Hits Wall, Raising Fed Easing Expectations

The US job creation engine slowed further last month, reinforcing market expectations for at least two rate cuts from the Federal Reserve in the remainder of the year. According to data just released by the Bureau of Labor Statistics, just 22,000 jobs were added in August - representing an undershoot relative to the 75,000-consensus forecast - and the unemployment rate held at 4.3 percent. The previous month was revised up to a still-low 79,000 from the 73,000 previously estimated, and average hourly earnings climbed 3.7 percent year-over-year, slowing from the 3.8-pace set in the prior month. The manufacturing sector—purportedly the intended beneficiary of President Trump’s tariff policies—shed 12,000 jobs and is down 78,000 on the year.

The dollar is slipping and Treasury yields are down across the front of the curve as traders fully price in a move at the Fed’s September meeting, and add to bets on more easing in the months ahead. With the “bad news is good news” dynamic fully in play, equity markets are advancing ahead of the open—but we would suggest treating this with caution, given that the data is pointing to an eventual drop in consumer spending. If hourly earnings, hours worked, and overall job creation continue to weaken in the months ahead, corporate earnings will inevitably suffer.

The Canadian economy generated fewer jobs than anticipated last month and the unemployment rate jumped, modestly raising market expectations for a cut as soon as the Bank of Canada’s mid-September meeting. According to an update published by Statistics Canada, -65,000 positions were lost in August and the unemployment rate jumped to 7.1 percent. Consensus estimates had pointed to around 5,000 new hires, with the jobless rate holding steady.

The Canadian dollar is trading lower, but the move hasn’t been terribly dramatic, given some slightly-positive details buried farther down in the report. Most of the loss—59,000 positions—came in part-time roles, while the full-time segment shrank by -6,000. Total hours worked were up 0.9 percent year-over-year, gaining 0.1 percent in the month, and the average hourly wage for permanent employees—closely watched by monetary policymakers—rose 3.6 percent from a year earlier, up from 3.5 percent in the prior month.

Next week could prove noisy:

French Prime Minister Francois Bayrou is widely expected to lose a confidence vote on Monday, forcing President Emmanuel Macron to choose a replacement capable of advancing a deeply-compromised fiscal consolidation measure. French yields have risen relative to their benchmark German equivalents, but spillover effects in currency markets have been relatively limited thus far, aligning with a long-standing pattern in which the euro only reacts to the most acute spikes in funding stress. At the moment, the common currency is dancing to the dollar’s tune, with domestic fundamentals playing a limited role in driving price action.

On Tuesday, the US Bureau of Labor Statistics could add to the downbeat outlook for labour market growth when it unveils preliminary benchmark revisions for employment for the 12 months through March. Economists think job creation was overstated by somewhere between 750,000 and 1.1 million jobs between the first quarter of 2024 and the first quarter of 2025,

We’re not aware of any institution expecting a move from the European Central Bank on Thursday, but investors will nonetheless pay close attention to the surrounding communications for guidance on the path ahead. Sentiment has turned sharply more hawkish in the last two months, and market participants have slashed expectations for further rate cuts, with policymakers now seen staying on hold through the next year as the economy stabilises and inflation pressures remain somewhat elevated.

Immediately thereafter, the August US consumer price index report could help set the stage for a “hawkish cut” from the Federal Reserve in the following week—or, alternatively, clear the way for a series of back-to-back moves at the central bank’s autumn and winter meetings. We think headline consumer prices climbed 2.9 percent in the 12 months to August—marking the fastest pace since last July—and expect tariffs to put upward pressure on goods costs, keeping core inflation running at around 3.1 percent. Taken in combination with elevated producer prices, this should put the core personal consumption expenditures index near 3 percent, at the upper end of the Fed’s target range.

Economic Calendar