The US economy generated stronger wage growth and more jobs than expected in December, adding momentum to an ongoing reversal in Federal Reserve rate cut bets across the financial markets. According to data released by the Bureau of Labor Statistics this morning, 216,000 jobs were added, and the unemployment rate held steady at 3.7 percent, remaining near historic lows. Average hourly earnings rose 4.1 percent year-over-year, solidly topping expectations for a 3.9 percent increase. Ahead of the release, consensus estimates had pointed to a 170,000-job gain, and the unemployment rate was seen moving slightly higher.

Diffusion indices – which measure the sectoral breadth of job gains – broadly improved, with the manufacturing sector staging a surprisingly strong recovery. More than half of the overall gain came in healthcare and hospitality sectors, but a range of other sectors contributed in a positive manner, and factories added 6,000 positions after a 26,000-role gain in the prior month.

The dollar is pushing toward a dramatic weekly gain, equity futures are moving lower, and yields are correcting upward as traders move to price in a less aggressive monetary accommodation process in the coming months. Rate cut expectations for the Fed’s March meeting are nearing 50 percent, and the two-year Treasury is yielding 10 basis points more as we go to print, with the ten-year back above 4.09 percent.

Non-farm employment diffusion indices, share of industries reporting growth (unchanged cut by half)

North of the 49th Parallel, Canada’s job creation engine stalled in December, with the number of people holding jobs remaining virtually unchanged. The unemployment rate held at 5.8 percent even as the population grew by 74,000, with the employment rate falling to 61.6 percent. Total hours worked rose 0.4 percent, up 1.7 percent year over year, and the unemployment rate rose to 5.8 percent. Economists had expected a circa-15,000-job gain, with unemployment rising to 5.9 percent. Average hourly wages rose 4.8 percent on a year-over-year basis, roughly matching the pace recorded in the prior month.

The Canadian dollar is tumbling against the dollar and its global peers as traders pull back on bets the Bank of Canada will lag the Federal Reserve in cutting rates. Yield differentials are widening against the loonie once again, suggesting that the currency could remain on the defensive for a while yet.