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Disappointing Jobs Numbers Drive Yields Lower

US labour markets slowed more than expected in June, bolstering market odds on a rate cut from the Federal Reserve by September.

On the headline level, the print was positive: according to data released by the Bureau of Labor Statistics, 206,000 jobs were added in the month, topping the 189,000 consensus forecast, and remaining well above the 120,000 that is generally believed sufficient to mechanically offset net growth in the labour force. Average hourly earnings climbed 0.3 percent month-over-month, down from 0.4 percent in the prior month, and were up 3.9 percent year-over-year.

However, revisions to prior months saw overall gains lowered by a total 111,000 positions, and wage gains decelerated, pointing to a continued softening in demand for workers. Perhaps most critically, the unemployment rate unexpectedly rose to 4.1 percent, bringing it closer to triggering the ‘Sahm Rule’ which has historically signalled an imminent downturn in the US economy.

Traders are selling the dollar and interest rates are slumping on firming prospects for a September rate cut, and yield-sensitive currencies are generally riding the tide higher. We expect Fed officials to enhance their rhetorical focus on the second half of their dual mandate in the weeks ahead, with Chair Powell beginning to telegraph easing ahead at the July meeting or the Jackson Hole conference in late August. The greenback’s relative overvaluation should begin to correct, particularly if volatility expectations remain suppressed through the summer months.

The Canadian economy lost jobs in June – helping increase the likelihood of a second consecutive rate cut at the Bank of Canada’s July 24 meeting. This morning’s update from Statistics Canada shows 1,400 positions were shed in the month, down from a revised 26,700 gain in May, with the unemployment rate rising sharply to 6.4 percent as the labour force expanded and job creation turned negative. Consensus estimates had pointed to roughly 20,000 new hires, with unemployment pushing up to 6.2 percent.

Average hourly wages for permanent employees – closely watched by monetary policymakers – rose 5.6 percent from a year earlier, accelerating from the prior month’s 5.2-percent print, but this was likely largely driven by the public sector, where salaries have been increasing faster than the general economy. Total employment has risen by 343,400 positions over the last year.

Hopes for a rate cut in July are rising, with Bank of Canada officials looking more likely to favour easing policy in back-to-back meetings. We think events over the coming weeks could help to calibrate expectations further – the Bank’s survey data, out on the 15th, could prove enormously important in determining how the Monetary Policy Report portrays underlying growth – but on the labour market’s current trajectory, market pricing should be assigning better-than-even odds to a summer move, with a cut by September fully priced in. The loonie is falling even as the greenback retreats, and its relative underperformance should continue.

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