Job growth in the U.S. slowed significantly last month with non-farm payrolls rising by only 210K in November, down from 546K in October. This was less than half of the 550K consensus forecast. The U.S. dollar sold off when the numbers came out but recovered quickly for 3 reasons:
1) First, the unemployment rate dropped to 4.2% to its lowest level since the pandemic. Economists had been looking for a more modest improvement but the uptick in the participation rate tells us that this was not a reflection of workers dropping out of the labor force.
2) In total, the U.S. economy has recovered more than 80% of the jobs lost since the pandemic.
3) Federal Reserve rate hike expectations remained intact with the futures market pricing in 25bp hike in June and 50bp hike in November.
While we are not enthused by the slowdown in average hourly earnings, the U.S. dollar recovered its losses quickly because there’s enough good news in today’s report for the Fed to accelerate its taper plans this month. Service sector activity also improved with the ISM index rising to 69.1 from 66.7.
In contrast, Canadian labor market numbers were very strong. More than 150K people found new work in November, five times greater than the previous month and significantly better than the 35K forecast. The unemployment rate also dropped to 6% from 6.7% to its lowest level since February 2020. USD/CAD fell sharply on the back of the weaker U.S. and stronger Canadian reports. We would not be surprised if the November jobs report marked a quadruple top for USD/CAD. Today’s strong jobs number should keep the Bank of Canada, who has a policy meeting next week hawkish.
The Australian and New Zealand dollars fell sharply on the back of a stronger U.S. dollar and weaker Chinese data. China’s Caixin Composite and Services PMI indices declined in November - a sign that economic activity in slowing is the world’s second largest economy. The Reserve Bank of Australia has a monetary policy announcement next week. Between Omicron, equity market volatility and Chinese data, we expect the RBA to remain cautious.
Downward revisions to Eurozone and U.K. PMIs drove euro and sterling lower. GBP fell more aggressively than EUR after Bank of England policy member Saunders said the economic impact of Omicron is a key consideration for their December meeting. Looking ahead aside from the rate decisions, the German ZEW survey, UK industrial production and monthly GDP report are also numbers to watch. For the U.S., the main focus will be on the November consumer price index and December University of Michigan consumer sentiment report.
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