Employment still rising, but what about wages?

Both the United States and Canada reported solid job gains for February. However, given recent comments from the central banks, it is perhaps appropriate to focus more on wage trends as a guide to future policy moves. Today's reports suggest diverging trends in wages in the two countries -- and not in the way you might expect.

The US economy added 311,000 jobs in February, well above the 205,000 markets had expected. There were small downward revisions to the previous two months' data and the unemployment rate edged up to 3.6 percent, but there is no doubt that the employment market remains tight. Surprisingly, however, wage growth remains very restrained: average hourly earnings rose only 0.2 percent in the month, resulting in a year-on-year rise of 4.6 percent, still well below the headline rate of inflation.

Market expectations for the March 22 FOMC meeting had tended to favour a 50 basis point hike after Chair Jerome Powell's hawkish testimony before Congress earlier in the week. Those expectations have now been scaled back towards a 25 basis point hike, although it is not clear how much this shift may have been driven by today's collapse of SVB bank rather than by the jobs report. Next week's CPI data represent the last major data point before the FOMC session. A helpful base effect is likely to push the year-on-year rate lower, which should make it easier for the Fed to settle on the smaller rate move. 

In Canada, StatsCan reported that the economy added 22.000 jobs in February. This was well below the outsize gains posted in the prior two months -- which have, somewhat surprisingly, not been revised away -- and left the unemployment rate at 5.0 percent, close to its all-time low. The private sector more than fully accounted for the month's job gains.

But what about wages?  Year-on-year wage gains reached a cyclical high of 5.8 percent in November 2022 before moving lower in December and January. However, the increase accelerated to 5.4 percent in February from January's 4.5 percent reading. It's entirely possible that February CPI data will show a year-on-year increase at or below the rise in wages. That would certainly raise questions about the Bank of Canada's "conditional" pause in tightening, even though there is scant evidence that the fall in inflation is the result of the Bank's policy moves. 

Interesting, isn't it? The central bank that has been talking tough may now have at least one good reason to go easy on further rate hikes, while the one that has been talking about a pause may have some explaining to do.