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US Inflation Revisions Are Damp Squib, Canadian Jobs Beat

Revisions to seasonal adjustments used in the US consumer price index helped push bond yields lower and boost equity prices this morning. The annualized change in headline inflation over the last six months of 2024 was reduced by 0.2 percent, while core price growth remained unchanged. This combination should leave monetary policymakers unmoved, but will also alleviate hedging requirements among market participants who had feared a repeat of early-2023’s revisions. 

All-items consumer price index, monthly % change

The Canadian economy generated more jobs than anticipated in January, but wage growth slowed sharply, helping firm market expectations for an imminent pivot toward easier monetary policy from the Bank of Canada. 37,000 new positions were added in the month and the unemployment rate fell to 5.7 percent from 5.8 percent in December. Consensus estimates had pointed to 15,000 new hires, with elevated population growth and still-high participation rates pushing unemployment to 5.9 percent. 

The services sector generated most of the gains, with the retail and wholesale, finance and real estate, and education groupings offsetting losses in hospitality, professional services, health care, and social assistance. Total hours worked were up 1.1 percent year-over-year, gaining 0.6 percent in the month.

The average hourly wage for permanent employees – closely watched by monetary policymakers – fell to 5.3 percent from a year earlier. This is still considered sufficient to put upward pressure on services sector price measures, but is likely reflective of “catch up” gains (in contrast with rising labour market demand), and is also indicative of growing slack in the Canadian economy. 

The Bank of Canada looks likely to closely match the Federal Reserve in the timing and pace of easing, but risks are tilted toward an earlier move off the starting block. Canada’s economy is clearly facing more serious headwinds than its southern counterpart, with our modified version of the Sahm Rule recession indicator remaining triggered for a third consecutive month. A financial conditions-driven “melt-up” in consumer borrowing and spending remains possible however, making it unlikely that Tiff Macklem & Co. decide to pull the trigger on rate cuts at the Bank’s March meeting. 

Modified Sahm Rule recession indicator, %

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