Market Wire: North American job reports kick rate forecasts higher

The US job-creation engine smashed forecasts again last month, lowering market expectations for a swift policy reversal from the Federal Reserve. According to data released by the Bureau of Labor Statistics this morning, 253,000 jobs were created in April, down from a revised 165,000 in the prior month, even as lending conditions deteriorated and economic sentiment worsened. The unemployment rate fell to 3.4 percent from 3.5 percent in March, with the participation rate held at 62.6 percent. 

Average hourly earnings rose 4.4 percent year-over-year, stronger than the 4.2 percent expected, and well beyond levels that would suggest inflation risks have receded.

Ahead of the release, investors were positioned for a 185,000-job gain, with the unemployment rate seen holding at 3.6 percent. 

The dollar is regaining some poise, Treasury yields are rising incrementally, and equity futures are slipping as we go to pixels - but the overall market reaction suggests that the bad-news-is-good-news dynamic that has been in place for many months is beginning to give way as participants begin to welcome signs of underlying economic resilience. 

North of the border, Canada added 41,400 jobs in April, up from the 34,700 reported in the prior month as the economy continues to defy expectations for a more profound slowdown. The unemployment rate held at 5.0 percent, with job creation outpacing higher immigration volumes. Average hourly earnings grew 5.2 percent on a year-over-year basis, maintaining the 5.2 percent pace recorded in the previous month. 

Economists had expected a 20,000-job gain, with unemployment rising to 5.1 percent. 

The monetary policy implications are surprisingly unambiguous: the Bank of Canada is likely to remain on hold, with still-elevated underlying inflation pressures and relatively-robust economic activity levels adding to strong employment growth in supporting the case for keeping policy restrictive, even as sentiment and credit creation measures point to an imminent slowdown. This should narrow the gap between US and Canadian yields on the front end, and help push the Canadian dollar decisively through the 1.35 mark against the greenback - even as weaker oil prices add drag.