Market Wire: Dollar Tumbles as US Labour Market Slows

US labour markets softened more than expected for a second month in August, bolstering odds on a more decisive easing response from central bankers this autumn. According to data released by the Bureau of Labor Statistics, 142,000 jobs were added in the month, missing the 165,000 consensus forecast, and revisions to prior months saw overall gains lowered by a total 86,000 positions.

Wage gains accelerated, pointing to a stabilisation in worker bargaining power. Average hourly earnings climbed 0.4 percent month-over-month, doubling from 0.2 percent in the prior month, and were up 3.8 percent year-over-year.

The unemployment rate fell to 4.2 percent as had been expected, mostly reflecting a reversal in temporary layoffs, but didn't show the sort of improvement that might have unwound the impact of July's disappointingly-soft print.

The dollar is softening and Treasury yields are tumbling across the front of the curve as traders add to bets on an unusually-aggressive half-percentage-point move at the Federal Reserve’s September meeting. We don’t expect this to last for long: Fed officials - including New York’s John Williams and Governor Christopher Waller later today - seem likely to argue for a gradual easing pace in the months to come. The odds on deeper cuts at subsequent meetings have risen however, and the dollar is likely to remain on the defensive.

The Canadian economy added jobs in July - seemingly helping to ratify the Bank of Canada’s surprisingly cautious messaging earlier in the week. According to Statistics Canada, 22,000 positions were created in the month, but the gains were largely concentrated in part-time work, with 65,700 roles added against a loss of 43,600 full-time roles. The unemployment rate jumped to 6.6 percent from 6.4 previously as the labour force expanded and job creation failed to keep pace. Consensus estimates had pointed to roughly 25,000 new hires, with unemployment pushing up to 6.5 percent.

Average hourly wages for permanent employees - a variable typically closely watched by central bankers - rose 4.9 percent from a year earlier, slowing from the prior month, but with public sector pay agreements likely playing an enormous role in influencing the data, we suspect policymakers won't assign much importance to the shift.

Bank of Canada officials seem inclined to favour easing policy in back-to-back meetings through to the early part of next year, but - as Governor Macklem hinted on Wednesday - bigger moves don’t look likely at this time. The loonie is climbing relative to the dollar, and could extend recent gains if US policy expectations continue their decline.