The dollar is trading with a firmer bias ahead of a week filled with first-tier economic events, and after Friday’s forecast-crushing US jobs number triggered a pop in Treasury yields. Both the pound and euro are starting the week on the back foot, weakened by expectations of earlier rate cuts from the Bank of England and European Central Bank, while the Japanese yen remains hemmed in by short sellers on one side and the threat of intervention on the other. Global oil benchmarks are losing altitude after Israel said it would withdraw some troops from Gaza, reducing perceived geopolitical risk premia.

To recap Friday’s action: The March US non-farm payrolls report was a blockbuster. Headline jobs growth topped 303,000 – well above market consensus that had been set around the 215,000 mark – and the unemployment rate dropped to 3.8 percent from 3.9 percent in the previous month. Treasury yields climbed on the print as market participants pushed easing expectations out toward the Fed’s September meeting, with odds on a third rate cut in 2024 tumbling below the 50-percent threshold. DXY-weighted rate differentials widened further in the dollar’s direction.

Canada’s data were far more disappointing. The country lost 2,200 jobs in March after gaining 40,700 in the prior month, and the unemployment rate edged up to 6.1 percent from 5.8 percent. Hours worked slipped for the first time since November, dropping -0.3 percent month-over-month. Expectations for rate cuts from the Bank of Canada and the Federal Reserve diverged sharply in the hour after the print.

But there are reasons to suspect that Friday’s reaction could fade somewhat over the coming days.

In the US, average hourly earnings increased just 0.3 percent, bringing the year-over-year pace of nominal wage growth down to 4.1 percent, down from the 4.3 percent pace set in February. If inflation continues its bumpy deceleration, Fed officials are unlikely to delay rate cuts because labour markets remain tight – as Jerome Powell himself put it, in response to a question during last month’s post-meeting press conference: “In and of itself, strong job growth is not a reason… for us to be concerned about inflation”.

In Canada, hours worked kept climbing on a three-month average basis, average hourly earnings accelerated to 4.5 percent year over year from 4.3 percent in the prior month, and the rise in the jobless rate wasn’t caused by layoffs. With the labour force growing by almost 60,000 and more than 90,000 people added to the overall population in the month, the country’s job creation engine simply failed to keep pace. We remain unsure as to whether our Canadian derivation of the Sahm Rule recession indicator – which typically signals the start of a downturn when the three-month moving average of the national unemployment rate rises by 0.70 percentage points or more relative to its low during the previous 12 month period – is providing an accurate read on underlying conditions in an economy that continues to absorb immigrants at a blistering pace. We don’t believe the Bank of Canada is ready to provide clear easing signals at this week’s meeting.

Today’s data calendar is light, but traders will keep an eye on developments in the world’s second largest economy when onshore markets reopen this evening. The People’s Bank of China maintained the daily reference rate for the renminbi – the midpoint of the permitted trading range – unchanged at 7.0947 to the dollar last night, suggesting that policymakers remain committed to maintaining exchange rate stability. With the domestic economy unusually weak, outflows growing, and foreign investors leery of investing in onshore markets, participants have been pushing the yuan toward the bottom of its trading band in recent weeks – a move that risked undermining confidence further. The central bank has historically engaged in both overt and more stealthy forms of intervention during periods of currency weakness, but with external competitiveness suffering, some observers had come to believe that this time was different – that authorities would slow-walk an exchange rate decl

Still Ahead

TUESDAY
The European Central Bank’s first quarter Bank Lending Survey should show demand for mortgages and corporate loans rising slightly for the first time in two years even as credit standards become more restrictive, suggesting that the most aggressive tightening campaign in the euro’s history continues to take a toll on the real economy. (04:00 EDT)

WEDNESDAY
The March US consumer price index report is expected to show the disinflationary process continuing at a painfully-slow pace. The headline all-items index is seen rising 0.4 percent month-over-month, maintaining February’s intensity on a rise in gasoline prices, while the core measure comes in at 0.3 percent – down from 0.4 percent in the prior month, but still well above the Fed’s comfort zone on a year-over-year basis. We think Jerome Powell’s preferred “supercore” measure – core services, excluding housing – should moderate somewhat, helping to alleviate fears of a reacceleration in underlying pressures. If we’re wrong, another overheated print could trigger a renewed rise in the dollar. (08:30 EDT)

The Bank of Canada is overwhelmingly likely to leave policy settings unchanged for a sixth consecutive meeting, but its messaging could prove more hawkish than many of us might have expected only a month ago. We suspect that last week’s disappointing jobs data is unlikely to translate into explicit easing guidance, especially given that first-quarter gross domestic product is tracking well above January’s projections, long-term inflation expectations are inching higher, and housing markets are looking poised for a spring melt-up. Officials – already wary of triggering a burst of irrational exuberance in bond markets and among Canadian consumers – could remain stubbornly non-committal on the likelihood of rate cuts this summer. (09:45 EDT)

Minutes taken during the Federal Reserve’s March meeting could also convey an uncomfortably hawkish tone, foreshadowing the stronger-than-anticipated data that has come out in the intervening weeks. Markets interpreted the “dot plot” summary of economic projections through a dovish lens at the time, given that policymakers avoided marking down the number of expected rate cuts this year, but it is clear that the balance of opinion was shifting toward a more gradual easing trajectory. Since the meeting, fourth quarter gross domestic product was revised higher, core personal consumption expenditures inflation came in above expectations, and the US jobs-creation engine accelerated, raising deep questions over the extent to which Fed policy is restricting economic activity. (14:00 EDT)

THURSDAY
European Central Bank officials have clearly telegraphed a summer rate cut for months, creating the conditions for an uneventful market reaction to this week’s decision. No new forecasts will be provided, but with markets assigning 97 percent odds to a move at the June meeting, and three more cuts expected by year end, we suspect investors might react negatively to signs of gradualism in Madame Lagarde’s comments. European core inflation prints have begun surprising to the upside, and oil prices are soaring, suggesting – to us, at least – that policymakers might want to begin walking autumn easing expectations back a bit. (08:15 EDT)

Producer prices – which form part of the basis for the Federal Reserve’s preferred personal consumption expenditures measure – are seen slowing to 0.3 percent in March from the overheated 0.6-percent month-over-month pace set in February, but higher commodity costs could deliver a surprising overshoot. Market reaction could be significant either way. (08:30 EDT)