Now what (part deux)?

The strong September employment data announced in the US last Friday effectively derailed expectations of another 50 basis point Fed rate cut any time soon. So how will markets react to the Canadian employment data released this morning, which are even stronger?

Per Statistics Canada, the Canadian economy added 47,000 jobs in September, after several months of little change. The increase served to push the unemployment rate slightly lower, to 6.5 percent, ending a long run of gradual increases. Details of the report were generally robust: there were 61,000 new private sector jobs in the month, offset by some job losses in the public sector; full time employment rose by 112,000; the job gains were well-dispersed across the country, with only BC and New Brunswick reporting lower employment; and hourly earnings rose 4.6 percent from a year earlier, lower than in August but still well ahead of inflation.  

Despite all these signs of strength, there are still some lingering issues. The employment rate (i.e. the percentage of the working-age population actually in employment) continued to edge lower in September despite the strong jobs gains. This reflects Canada's very rapid immigration-driven population growth. The national population rose an estimated 110,000 in September, to stand almost 1.2 million (or 3.6 percent) higher than a year earlier. The unemployment rate only ticked lower because the labour force rose by a surprisingly small 16,000 in the month.

The strong employment data seem to give the lie to the significant number of media types and other experts who have been loudly declaring that the Canadian economy is "already in recession", which it clearly is not. There have been suggestions that the Bank of Canada might follow the Fed in implementing a 50 basis point rate cut in the near future. With the Fed now likely to follow a more cautious path for a while, today's data show there is no compelling reason for the Bank to deviate from its current policy of gradual easing. 

Now what?

September's non-farm payrolls report, released this morning by the Bureau of Labor Statistics, came in way above market expectations. What does this mean for the US economy and for the direction of Federal Reserve policy? 

Employment rose by 254,000 in September, more than 100,000 above the level markets had expected. This is comfortably higher than the average monthly gain of 203,000 posted over the past twelve months. Moreover, the relatively weak monthly increases reported for July and August were revised higher by a total of 72,000 jobs.  For the second straight month, the unemployment rate ticked down, to stand at 4.1 percent. Average hourly earnings rose 0.4 percent in the month to stand 4.0 percent higher than a year earlier, and are now reliably running ahead of the rate of inflation. 

Recent Fed-speak, including the statements made after last month's FOMC rate cut, have clearly shown that the Fed is now largely convinced that it has got inflation under control, allowing it to focus more on signs of weakening in the jobs market. To the extent that the Fed was using the July and August non-farms data as evidence of that weakening, the upward revision of the data for those months might be seen as a sign that the 50 basis point cut was an over-reaction. The strong September data certainly suggests the same thing. In that case, it would be reasonable to expect that the two remaining FOMC meetings this year will bring smaller rate cuts, or even conceivably a pause in the easing cycle as the Fed waits for more data to come in. 

There are at least two factors complicating the near-term rate outlook. First, the October jobs numbers are likely to be messy, thanks to the strike at Boeing, the strike (albeit now over) at East Coast ports and the lingering impact of Hurricane Helene.  (Note, however, that in reporting today's numbers the BLS said that Helene has had no measurable impact on the data).  These factors may all bias the October data downwards, but given the statistical "noise" in the numbers, the Fed will react cautiously. Second, the ever-expanding mayhem in the Middle East may push global oil prices sharply higher, which would affect prices in the US even though it is no longer reliant on energy supplies form that region. 

The next FOMC meeting is set to take place right after election day.  While it is quite possible (to say the least) that the outcome of the vote will not be known by the time the Fed makes its announcement, there is no risk that whatever decision is announced can be construed as "political". Barring any major surprises in the data flow, the likeliest outcome in both November and December is for a 25 basis point rate cut, but a pause in the easing cycle becomes more likely as we move into the new year.