Market Brief: Rising Unemployment Hits Both US and Canadian Dollars

The US job creation engine came back to life in November after October’s strike- and hurricane-related slowdown, but the rebound likely wasn’t strong enough to derail the Federal Reserve’s easing plans. According to data just released by the Bureau of Labor Statistics, 227,000 jobs were added in the month - topping the 220,000-consensus forecast - and October’s headline print was revised up to 36,000 from the 12,000 previously estimated. Average hourly earnings climbed 0.4 percent month-over-month, holding at the pace set in the prior month.

The unemployment rate climbed to 4.2 percent however, adding to signs of broader labour market softness that should keep central bankers on an easing trajectory. A big upside surprise in next week’s consumer price index report could change market views, but for now, the Fed’s focus on unemployment risks should mean that another quarter point cut is delivered in December, followed by a brief pause in January, and at least two - possibly three - more cuts in the new year.

The dollar is slipping and Treasury yields are inching down across the front of the curve as traders bolster wagers on a rate cut at December’s Federal Reserve meeting and prepare for a slightly more aggressive easing trajectory in the months to come. Most majors are climbing in relative terms, with the euro and pound making the biggest advances thus far, even as the Canadian dollar tumbles.

Canadian unemployment surged by more than anticipated in November, helping raise market odds on a jumbo-sized rate cut at next week’s central bank meeting. 51,000 new positions were added in the month but elevated population growth and still-high participation rates caused the unemployment rate to jump to 6.8 percent, blowing past consensus estimates for a rise to 6.6 percent.

On balance, we now think the Bank of Canada will move more aggressively next week, cutting by 50 basis points and telegraphing a faster return to neutral in 2025. Policymakers may decide to move more cautiously - there are signs that the lagging impact of previous rate cuts is beginning to boost housing markets and consumer spending - but with shelter prices excluded, inflation is running well below target, and there is more than enough slack available to prevent a rapid rebound in prices. And Canada’s job market remains seriously unbalanced, reflecting an economy that is struggling to generate private sector growth.

At an event on Tuesday, former Bank of Canada Governor Stephen Poloz provided a negative prognosis, saying “I would say we’re in a recession, I wouldn’t even call it a technical one,” before providing more context: “A technical one is a superficial definition that you have two quarters of negative growth in a row, and we haven’t had that, but the reason is because we’ve been swamped with new immigrants who buy the basics in life, and that boosts our consumption enough”. We would tend to agree, and it is likely that his former colleagues do as well.

Looking elsewhere, the spread between French and German bond yields is nearing a two-week low and the euro is outperforming its counterparts after Marine Le Pen - the architect of this week’s government downfall - said she expects a new budget to be delivered in “a matter of weeks”. In an interview with Bloomberg, the head of the far right National Rally party said a plan setting out a “reasonable trajectory” for public finances - with deficits shrinking more slowly than Prime Minister Michel Barnier had proposed - could win her approval. In the interim, President Emmanuel Macron is expected to appoint a new slate of caretaker leaders, and the government will continue to operate - marking a stark contrast with the US, where budget battles regularly threaten to bring activity to a standstill.

Economic Calendar