Market Wire: US and Canadian jobs reports crush expectations, triggering outperformance in both currencies against global peers

US labour markets gained momentum in May, firming market expectations for a rate hike from the Federal Reserve by year end. According to the Bureau of Labor Statistics, 172,000 jobs were added in the month—representing a solid overshoot relative to the 85,000-consensus forecast—while the previous two months were revised up by a total 93,000 positions, bringing the three-month average pace of job creation up to 188,000, from 48,000 ahead of the update.

Hiring was relatively well-diversified, with payrolls growing by 70,000 in the leisure and hospitality sector, 35,000 in healthcare, and manufacturing and non-residential construction eking out gains.

Conditions tightened, with the unrounded unemployment rate ticking down to 4.296 percent from 4.337 percent previously. Average hourly earnings climbed 0.3 percent month-over-month, accelerating from the 0.2-percent pace set in the prior month, rising 3.4 percent year-over-year.

With overall job creation running well above most estimates of the “breakeven rate”—the number of roles needed to absorb new labour market entrants and keep the unemployment rate stable—and the war in the Middle East driving an intensification in inflation pressures, there’s little to suggest that the American economy would benefit from an easing in monetary policy settings.

The dollar is advancing and Treasury yields are up in spectacular fashion across the policy-sensitive front end of the curve as traders move to fully price in a rate hike by the Federal Reserve’s December meeting. The euro, pound, and yen are coming under selling pressure as rate differentials tilt further toward the greenback.

The Canadian economy unexpectedly generated far more jobs than anticipated last month, helping offset some of the headwinds facing the Canadian dollar. According to an update just published by Statistics Canada, 87,800 new positions were added in May and the unemployment rate fell to 6.6 percent. Consensus estimates had pointed to 10,000 new hires, with the jobless rate seen holding at 6.9%.

154,000 positions were added in full time roles—almost completely offsetting the -152,000 loss reported between January and April—while part-time roles fell by 66,000. Hiring for the national census likely helped provide some lift, but with the private sector outpacing public sector gains, and only 32,000 census roles expected over a three-month period, that doesn’t provide a sufficient explanation for the headline gain. The average hourly wage for permanent employees—closely watched by monetary policymakers—fell sharply to 3.2 percent from a year earlier, down from 4.8 percent in the prior month.

Traders are adding to bets on a rate hike from the Bank of Canada before the end of the year, and (unlike in other foreign exchange pairs) cross-currency rate differentials are holding firm, reducing some of the selling pressure that had sent the loonie careening toward the 1.40 threshold against the US dollar. One report does not a trend make, but a more supportive data backdrop could help put the foundations in place for an extended rally once the Strait of Hormuz is reopened.