Recent U.S. labor market data has quickly shifted expectations for the Federal Reserve’s next monetary policy actions. This news has all of us on the lookout here for possible changes. Scheduled to meet on December 9-10, the Fed is closely monitoring various economic indicators as it prepares to assess its interest rate strategy. As the most recent unemployment figures indicate, it’s a tale of two labor markets. The unemployment rate also increased to 4.4%, slightly higher than analyst consensus of 4.3%. By contrast, the labor force participation rate increased to 62.4%, an indication of an increasingly active workforce.
Furthermore, U.S. earnings has been up YoY 3.8%, slightly above the 3.7% expected. Here in the U.S., inflation is reported at around 3%, fueling speculation about future interest rate increases. If inflation should fall below the Bank’s 2% target—or if unemployment starts to climb further—something might be in the works.
Labor Market Performance
The labor market experienced historic shifts across many important measures. Job creation Nonfarm Payrolls (NFP) added 119,000 jobs last month, well above the expected 50,000. This strong employment growth is an encouraging sign of the job market’s resilience in the face of rising unemployment rates. In addition, the last month’s NFP numbers have been revised. They are still not right — now, instead of a reported gain of 22,000, they show a decline of 4,000.
Average Weekly Hours held flat at 34.2 hours per week, a sign that work hours are firming up for the economy overall and within nearly every industry. Average Hourly Earnings increased by just 0.2% month-on-month, missing a forecasted 0.3% increase. As the Fed prepares for its next meeting later this month, this mixed performance will likely shape how they proceed.
Federal Reserve’s Policy Outlook
The Federal Reserve’s guidance and behavior continue to be the driving force of the market’s expectations about upcoming interest rates. Dismissive hawkish posturing from various Federal Reserve officials has had traders running for cover. Consequently, they’re putting just a 39% probability on a rate cut in December. That’s a drop from close to 50% just a week ago. It remains to be seen what today’s blockbuster labor data will do to sentiment.
We know that the Fed is operating in a complicated decision-making environment. If inflation remains below the target of 2% or if unemployment continues to rise, it may consider lowering interest rates to stimulate economic activity. What makes this pessimistic scenario a little tougher to swallow is the current inflation rate, which hovers around 3%.
USD/CAD Exchange Rate Response
In reaction to these events, the USD/CAD exchange rate has experienced significant volatility. Currently trading just above 1.4074, the pair trades close to a two-week high due to overall strength seen in the U.S. dollar. The labor data and Fed outlook have influenced traders’ sentiment towards the currency pair, with many reacting to the perceived strength of the U.S. economy.
Canada’s producer price data has been on a hot streak, and predictions for October are no different. This sinks another layer of complexity into the currency dynamics between the two nations. Traders will be keen eye on these fluctuating economic indicators. They are on the lookout for any fresh news that might affect the outlook for monetary policy and the exchange rate.